banque lblux annual report 2012 - amazon web services

Banque LBLuxAnnual Report 2012

Management report 13Report of the Réviseur d’Entreprises agréé 69Income statement 72Balance sheet 74Statement of changes in equity 76Cash flow statement 78Notes

(translation of the German version, which prevails in case of discrepancy)

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Banque LBLux S.A.

Registered office:3, rue Jean MonnetL-2180 Luxembourg

Boîte postale 602L-2016 Luxembourg

Telephone: (00 352) 42 434-1Fax: (00 352) 42 434-5099Corporate BankingFax: (00 352) 42 434-3399Private Banking & Wealth ManagementFax: (00 352) 42 434-4499Treasury & SecuritiesFax: (00 352) 42 434-3199Fund ManagementFax: (00 352) 42 434-5196

[email protected]

SWIFT/BIC: BYLA LU LL

R.C.S. Luxembourg: Nr. B 11035

Alain Weber

Chairman of the Management BoardEsch-Alzette

Management Board

Norbert F. Palsa

Member of the Management BoardJunglinster

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Management Board / Supervisory Board

Until the board structure was changed with effect from 14 December 2012, the administration and management of the company were the responsibility of the Management Board.

During the period from 1 January 2012 until the board structure was changed with effect from 14 December 2012, the following gentlemen were members of the Management Board:

Nils NiermannMember of the Management Board of BayernLB, MunichChairman of theManagement Board

Jan-Christian DreesenMember of the Management Boardof BayernLB, MunichDeputy Chairman of theManagement Board

Dr. Michael BraunHead of the Group Strategy& Group Communications Division of BayernLB, MunichMember of the Management Board from 11.05.2012

Dr. Detlev GröneVice Chairman of Corporates Overseas Division of BayernLB, MunichMember of the Management Board

Dr. Sebastian KleinHead of the Group Strategy & Group Communications Divisionof BayernLB, MunichMember of the Management Board until 01.05.2012

Marcus KramerMember of the Management Board ofBayernLB, MunichMember of the Management Board

Norbert PalsaAdministrateur-Directeur ofBanque LBLux S.A., LuxembourgMember of the Management Board

Alain WeberAdministrateur-Directeur ofBanque LBLux S.A., LuxembourgMember of the Management Board

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With the shareholders’ resolution of 17 February 2012, BayernLB decided to replace the Bank’s existing one-tier board structure (Management Board) with a dual board structure (Management Board, Supervisory Board). In an extraordinary general meeting that took place on 4 December 2012, the changes to the Banque LBLux S.A. articles of association necessary for this were decided upon with effect from 14 December 2012.

With the resolution made in the general meeting that took place on 4 Decem-ber 2012, the following gentlemen were appointed members of the Bank’s newly-formed Supervisory Board with effect from 14 December 2012:

Nils NiermannMember of the Management Board of BayernLB, MunichChairman of the Supervisory Board

Dr. Michael BraunHead of the Group Strategy& Group Communications Division of BayernLB, MunichMember of the Supervisory Board

Jan-Christian DreesenMember of the Management Boardof BayernLB, MunichMember of the Supervisory Board

Dr. Detlev GröneVice Chairman of Corporates Overseas Division of BayernLB, MunichMember of the Supervisory Board

Marcus KramerMember of the Management Board of BayernLB, MunichMember of the Supervisory Board

Knowing the absolute limits of what can be done and working on the tiniest details before being satisfied that a work is complete – these are the signs of someone much in demand.

Personalities are fascinating because they consequently go their way.

Anyone wanting to master theircraft has to have experience.Real masterpieces only appearwith years of knowledge.

Passion means devoting with love to one thing that really matters. This is what turns craftsmanship into artistry.

ConfidenceTechnical dexterity and many years of experience are the best conditions for impressive creations. Having confidence in the master’s expertise is indispensable. Especially when the result of work can’t be seen directly and only becomes apparent when knowledge and selected materials are successfully combined. It is only through years of experience that masters develop the good feeling of having understood what their customers want and need.

This confidence placed in them is valuable, something that has to be earned. We are aware of this, which is why we aspire to enduring, reliable partnerships. The character makes all the difference: we are synonymous with security and – in the best meaning of the phrase – conservative virtues in investment and have been so since 1973. Our customers reward us with a high level of satisfaction and successful, long-term partnerships.

With our professional advice and individually designed solutions, we offer you an investment structure that precisely suits your requirements. Bespoke, personal and competent.

Acting in a credible, reliable and authentic manner in all matters –this is how we create a solid basis for an enduring cooperation of trust.

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Eva Ferranti

Even as a child, Eva Ferranti was fascinated by fashion and beautiful clothes. So in 1986, she moved to Italy to learn the art of dressmaking. For 12 years, she worked for and with the most celebrated designers and fashion houses and thereby perfected her knowledge and skills.

In 1999, she moved back to Luxembourg and opened her first boutique, Adamo & Eva, where she designed and sold her own collection. In so doing, she brought Italian tailoring to Luxembourg. Today, her studio in Luxembourg City bears her name.

In addition to being familiar with the craft, a bespoke tailor primarily has to use their experience to develop a fine feeling for which styles suit their customers. On the basis of this, sketches can be drawn and fine materials and accessories selected that boast intricate workmanship right down to the smallest detail, such that the hand-made garment is more than a mere item of clothing; it also expresses the individuality of the person wearing it.

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Claude Schmitz

Claude Schmitz was born in 1972 in Luxembourg and has worked as an independent jewellery artist and designer in his studio in Luxembourg City since 2001.

Whilst studying Interior Design in Germany, he discovered his passion for precious metals and stones and decided to study Metal and Jewel-lery Design and Goldwork – first of all in Antwerp, and then in London at the Royal College of Arts.

For more than ten years now, he has been designing and producing individual pieces of jewellery that on the one hand reflect traditional values and on the other hand feature captivatingly extraordinary, har-monious shapes. He is also widely recognised in Germany, Austria, the Netherlands, Portugal, Spain, the United States and Japan for his high-quality creations.

An intense creative process and engagement with the materials result in unique pieces that underline the personality of the individual wear-ing them. A fantastic feeling for proportions, a good eye and a steady hand for delicate detailed work are the basic technical requirements needed to create a perfect product.

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Management report 2012

The economy/economic environment

The sovereign debt crisis in the Eurozone was once again the dominant issue in 2012. Despite the overall solid progress in fiscal consolidation and structural reforms in the countries most affected by the crisis and significantly strengthened governance at the EU/EMU level, the high de-gree of uncertainty and the negative effects on demand of consolidation have been a drag on the Eurozone economy. Gross domestic product fell by 0.5% overall in 2012, although there were substantial differences among the member countries. While the upturn slowed significantly in the north, the south remained in recession, with the economies of Spain and Italy even seeing further deterioration. Confidence was then gradu-ally restored, starting with the ECB’s announcement in summer that under certain circumstances it would make unlimited interventions in the government bond market. Overall, with its very low interest rates, extensive provision of liquidity to banks and the support for the Euro, the central bank made a significant contribution to the preservation of the monetary union and stabilisation of the financial system in 2012. Relatively low inflation rates and inflation expectations that increased stability allowed the ECB to take this course. However, because of the further significant increase in energy prices, the overall inflation rate of 2.5% in the Eurozone exceeded the central bank’s stability norm. Again in 2012, there were major differences from country to country in yields on ten-year government bonds. In Germany, which is considered a

“safe haven”, yields remained extremely low at 1.5%; and in Spain and

Overview

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Italy they rose to as high as 7% at times. The equity markets profited from the low yields on bonds that are considered safe and from very extensive liquidity. The EURO STOXX 50 rose by 14% during the year, and the DAX shot up by nearly 30%. The Euro depreciated significantly against the currencies of its trading partners through the summer, but then recovered, nearly reaching the levels seen at the end of 2011.

Business model and strategy

Banque LBLux has been doing business in Luxembourg since 1973. As a wholly-owned subsidiary of BayernLB, Banque LBLux is integrated into the Group management of the BayernLB Group. With its international orientation and access to all currencies, services and investment products of the global financial markets, Banque LBLux is a reliable, competent and dynamic partner to its customers in banking transactions. Advice and support are geared towards the particular customer profile. It pursues a conservative risk policy.

It focuses on two areas of business: international Private Banking & Wealth Management and Corporate Banking for the Benelux area. Private Banking is primarily active in the field of individual advice and professional asset management for wealthy private clients and institutional investors. LBLux has been very successful as the only Luxembourg-based bank of German origin with a broad-based Corporate Banking direct business philosophy providing support for corporate clients in the Benelux area. These two activities are supported by the Bank’s own Treasury depart-ment. Banque LBLux also acts as custodian for funds administered by companies like BayernInvest Luxembourg S.A. and LRI Invest S.A.

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These business operations at Banque LBLux are underpinned by the advantages of Luxembourg as a financial centre, which features short decision-making paths, legal security, political stability and a high de-gree of flexibility. The close co-operation between the authorities and market players accelerates the approval process for new services and products. This means that banks can respond rapidly and specifically to market trends and new directives. Private and institutional investors ben-efit in this way from a broad and flexible range of financial services – with innovative products and services on attractive terms. These factors have resulted in Luxembourg taking first place in Private Banking within the EU. Luxembourg holds second place worldwide for funds, after the US.

Corporate BankingBanque LBLux has been working successfully in Corporate Banking in the Benelux area for more than 20 years. Target clients are medium-sized businesses (with sales of EUR 100 million to EUR 1 billion), major local businesses (with sales of EUR 1 to 5 billion) and listed companies (with sales of > EUR 5 billion) as well as commercial real estate, export and pro-ject finance customers, institutions and financial service providers from the Benelux area.

The Bank is primarily active in the fields of corporate finance, project/structured finance/PPPs (Public Private Partnerships), real estate finance, investment products and trading room products for interest-rate and cur-rency management, and also offers services such as support for the issue of promissory notes and Eurobonds in conjunction with the relevant de-partments at BayernLB. Many selected customers in the Benelux coun-tries now consider Banque LBLux one of their key financing partners.

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Banque LBLux’s longstanding presence in the Benelux market gives it an established position in bilateral and syndicated finance, in which it sup-ports its customers principally through loans and promissory note loans, as arranger or participant. The strong competition in the highly competitive high-end Corporate Banking market segment requires professional ser-vice that meets the individual needs of the client. Banque LBLux employs experienced multilingual relationship managers and credit analysts who are familiar with the specifics of the Benelux area. With their high level of advisory competence and international expertise, they support the financ-ing projects of their clients.

In Corporate Banking, the focus in 2012 remained on reinforcing business relationships with corporate, project and real estate clients, and selective expansion of the client base. With this in mind, the Bank succeeded in consolidating its position with interesting clients among core banks with a high potential to add value. The Bank enjoys a broadly diversified client base developed over many years of close and trust-based cooperation. The volume of the Bank’s Benelux portfolio declined in the reporting year because of the difficult market conditions. This led to the total volume of business in Corporate Banking at year-end 2012 standing at EUR 3.2 billion (previous year: EUR 4.4 billion). This decrease is due partly to the decline in the Group’s credit business and partly to falling demand for cor-porate loans in the current economic environment. In addition, during the financial crisis banks have tightened their lending standards, and financing via loans has been replaced by corporate bonds. We set high standards for the rating of borrowers and assessment of credit risks, with internal risk-oriented ratings serving to provide an overall assessment and man-age the credit portfolio. We formed an adequate level of risk provisioning.

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Private Banking & Wealth ManagementThe Private Banking & Wealth Management department at Banque LBLux is the centre of competence within the BayernLB Group for international investment advice, asset management and wealth management. Wealthy individuals, institutional clients as well as entrepreneurs and foundations can access a broad range of services customised for their target group, such as advice in the area of financial and investment planning over gen-erations. Other services, such as advice on grouping of family assets into Luxembourg corporations, etc., are also offered.

Two main different models are offered in asset management: LBLux Active Mandate and individual asset management with LBLux DeLuxe.

Banque LBLux offers partners such as savings banks and independent as-set managers a sophisticated range of services tailored to this customer group. In the custodian bank area, fund companies and initiators profit from a comprehensive range of services for traditional and alternative investments. Partners in these two B2B areas also profit from various options for technical connections in order to exchange data and reports.

Each customer and partner receives individualized, trustworthy advice. The goal is to maintain the continuity and reliability of the customer rela-tionship over the long-term. A high standard of quality in the advice pro-cess, a state-of-the-art IT system geared towards the needs of Private Banking and excellent service round off the product range. An objective product selection for compiling customer portfolios is a matter of course. Products tailored to customers’ needs are provided quickly and inexpen-sively, if necessary in conjunction with the Treasury department, the par-ent company or selected partners.

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At year-end all client transactions are compiled into a statement of in-come and expenses, which is automatically made available to each cus-tomer. During the year all the holdings are shown clearly in an asset portfolio with reference to all currencies.

In 2012, together with the Deutsche Mittelstands-Bund (German As-sociation of SMEs; DMB), Banque LBLux established the “Generational change and succession in SMEs” competence centre. With 14,000 members, the DMB is one of the largest special-interest associations in Germany; the organisation views itself as a service provider to German SMEs. The objectives of this joint competence centre are to increase awareness and professional knowledge of the importance of successor planning in SMEs. LBLux brings many years of expertise in the develop-ment and support of succession plans and competence in the areas of generational change and asset management.

The European sovereign debt crisis was the dominant issue again in 2012. Because of the uncertainty in the markets, customers remained nervous about the investment markets. Nevertheless, in the Private Banking & Wealth Management segment we recorded an overall sol-id performance. As at 31 December 2012, Private Banking & Wealth Management had assets under management of around EUR 7.4 billion, of which EUR 3.2 billion is attributable to the custodian bank area.

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The custodian bank area was further expanded in terms of personnel and technology. Targeted sales measures were developed and a sales and service concept was defined in order to win additional mandates.

Treasury & SecuritiesThe Treasury’s main activity consists of managing liquidity, interest and currency risks for the Bank. Support for the Private Banking divisions, in particular through commission trading and Corporate Banking, is the core duty of Treasury. No trading is carried out on the Bank’s own account. Interest incongruities of up to 12 months are actively managed. Beyond these there are no significant risks associated with interest-rate changes. No use is made of complex or highly speculative products.

The Treasury division’s priority in 2012 was once again to ensure the Bank’s supply of liquidity. Owing to the ongoing financial crisis, liquidity in the interbank market remained persistently scarce in 2012. Banque LBLux was able to ensure liquidity at all times. BayernLB supported the structural liquidity of Banque LBLux.

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Letter of comfort

BayernLB ensures in proportion to its quota of shares owned (100%) that Banque LBLux is able, aside from political risk, to fulfil its contrac-tual obligations.

Employees

Our employees are competent and professional service providers for our customers. Investment in further education for our Employees plays an important role, in addition to the selection of first-class products. With a total of 992 training days in 2012 (+35% over the previous year), 97% of our Employees took part in at least one of the total of 171 individual train-ing courses (+30% over the previous year) in the area of professional and management development.

On the Bank’s talent management front, the “Encouraging Potential” module has become firmly established. For example, a further group of talented new hires has successfully completed the in-house develop-ment program for high-potential employees, thus preparing them for additional professional and/or management duties.

The employment market in Luxembourg continued its modest perfor-mance of the previous years in 2012. This provided opportunities to gain qualified employees in selected client-facing roles, in customer service and for the further expansion of the custodian bank function. The Bank has been involved for years in the vocational training of high school gradu-ates through the Luxembourg bank training course (Emploi formation) in

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cooperation with the Institut de Formation Bancaire Luxembourg. Another new class of trainees started in October 2012. We also continued our collaboration with the University of Maastricht to win talented university graduates.

The principal features of the employee structure in the reporting period were continuity and stability. The average length of service was 12 years and the average employee age was 41. At 31 December 2012 the Bank employed 182 staff, including 22 under individual part-time agreements.

Corporate responsibility

For many years now, Banque LBLux has assumed corporate responsibil-ity, particularly in the fields of art and culture, social affairs and sustainabil-ity. As an example, Banque LBLux has for a long time made donations to social institutions instead of giving Christmas presents.

In 2012 Banque LBLux supported the children’s aid organisation SOS Villages d’Enfants Monde, the Luxembourg-based foundation for children suffering from cancer (“Fondatioun Kriibskrank Kanner”) and the Archi-convent in Munich, a monastery that has set itself the task of relieving the suffering of the very poor and needy by providing them with food, clothing and other necessities. A permanent part of the support for com-munity affairs is the annual donation to the Oeuvres Paroissiales (Paro-chial Works) of the Sacré-Coeur Community in Luxembourg City, provid-ing care for people in a precarious social position or individuals or families who have fallen on hard times.

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In spring 2012, the Luxembourg photographer Marc Theis had a photog-raphy exhibition entitled “Scorpions – by Marc Theis” at Banque LBLux. During the rock band’s many performances, Theis took unique black-and-white photographs of the musicians onstage, backstage and in private on their tour. “Time for ... Art” was the theme of another exhibition by Lux-embourg artist Josianne Marschal at Banque LBLux. Marschal was also involved in a children’s studio as part of Private Art Kirchberg. On this day, a number of institutions open their doors to art lovers and exhibit many works of art that are not normally available to the public. The bank once again supported Luxembourg’s MUDAM (Musée d’Art Moderne Grand-Duc Jean) in 2012. The museum holds exhibitions showing a variety of contemporary works of art: media include painting, drawing, photography, multimedia, fashion, design, graphics, audio and architecture.

Sustainability is taken very seriously at Banque LBLux. For this reason the Bank has a long history of implementing environmental protection meas-ures in its own office building. These include operating without a conven-tional air-conditioning system, the use of grey water in toilet facilities, vari-ous energy-saving measures and active recycling. Consumption of energy and other resources is subject to constant monitoring, with analysis and commenting in the form of monthly reports and an annual eco-balance sheet. Particular attention is given to the resulting information in future business decisions on sustainability.

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Earnings situation

Because of the positive business development, income for the 2012 financial year exceeded budget in spite of the ongoing financial crisis.

In the 2012 financial year, Banque LBLux recorded a profit of EUR 15.8 million compared to a post-tax loss of EUR 23.0 million for the 2011 financial year. Write-downs on Greek government bonds totalling EUR 99.5 million had the biggest impact on results for the 2011 financial year. The General Meeting will recommend distributing the full amount of the profit for the financial year. The income for the 2012 financial year also includes the recovery of participation rights in the amount of EUR 22.2 million, after the participation rights participated in the loss in the previous year. This recovery is reported in Other Income.

Net interest income was EUR 48.5 million, 30% below the previous year’s level of EUR 69.7 million. This is primarily the result of the remu-neration of the participation rights of EUR 14.7 million made again in the 2012 financial year after no remuneration was paid in the previous year because of the loss recorded and the corresponding participation in that loss. Allocations to risk provisions for the 2012 financial year were EUR 2.2 million. Net interest income after risk provisions thus totals EUR 46.2 million.

Development of businessin 2012

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Because of the decline in the lending business, at EUR 17.9 million, net commission income was slightly behind the previous year’s level of EUR 18.6 million.

Administrative expenses stood at EUR 32.9 million, ahead of the previ-ous year’s EUR 30.7 million. This increase is due to higher personnel expenses for the additional custodian bank business, the allocation of pension provisions and material expenses for a major IT project. Admin-istrative expenses include the costs incurred by Banque LBLux acting as a service provider in the IT sector as well as providing other services to key locations of the BayernLB Group. Compensation for these services is reported under Other Income.

The Bank has fully taken into account all recognisable risks.

At its meeting in February 2013, the Supervisory Board resolved to pro-pose to the General Meeting to distribute the entire profit for the year, EUR 15.8 million, as a dividend.

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Financial situation

The balance sheet total of Banque LBLux again declined significantly by about EUR 2 billion from the previous year’s balance sheet date to EUR 4.5 billion. The transaction volume totalling EUR 5.6 billion was down by 26%. These falls result from the faster-than-scheduled reduction in stra-tegic non-core operations, which were reduced by EUR 0.5 billion in the reporting year and amounted to EUR 0.3 billion as at 31 December 2012, and to the continued significant lowering of risk, particularly by reducing the investment portfolio. The deleveraging is thus nearly complete.

Loans and advances to banks were unchanged from the previous year at EUR 0.6 billion, while loans and advances to customers declined by 17% to EUR 2.2 billion. The investment portfolio was reduced from EUR 2.9 billion to EUR 1.4 billion.

Liabilities to banks for refinancing the lending business decreased at the reporting date by 37% to EUR 1.9 billion (previous year: EUR 3.0 billion). Customer deposits increased slightly to EUR 1.7 billion. Securitised liabili-ties fell from EUR 1 billion to EUR 10 million as both LBLux issues were bought back in the 2012 financial year.

The development of total assets and of the individual balance sheet items reflects the consistent focus of Banque LBLux on its core customer business.

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The forecasts of Banque LBLux’s performance as presented below may diverge substantially from actual results, if one of the uncertainties in-dicated below or any others occur, or the assumptions on which the statements are based prove to be inaccurate. Banque LBLux does not accept any obligation to update the forecasts in view of new information or future events in the period covered by the forecast.

Economic environment

The emerging markets, particularly in Asia, will remain the growth cen-tre of the world economy in 2013. The economy of the United States will also make a positive contribution with growth of 2%. However, the unresolved budget problems will hurt confidence in the dollar. The com-promise reached at the beginning of the year to avoid the so-called fiscal cliff only bought some time. Instability in the Middle East and the ongoing conflict over Iran’s nuclear programme represent additional risk factors. In the absence of such disturbances, the Eurozone economy could regain some momentum in spring 2013. However, the south will not be able to overcome the recession coupled with very high unemployment. Overall, indications point to a stagnation of real gross domestic product. Consum-er prices will rise by just under 2%. The sovereign debt crisis will continue to ease if the crisis-hit countries stay on the reform path. Parliamentary elections in Italy in the spring and in Germany in autumn could result in temporary irritations. The ECB will maintain its very expansionary policies

Outlook

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in 2013. With the easing of tensions in the sovereign debt crisis, yields in Germany will increase moderately and reach 2% by the end of the year (10-year government bonds). Interest rates in the crisis-hit countries in the Eurozone should converge further. The equity market will maintain its upward trend if the economic recovery continues through the year and outlooks for 2014 remain favourable.

Development of Banque LBLux

Because of the extremely adverse effects of the international financial crisis, which began in mid-2007 in the US subprime mortgage seg-ment, BayernLB required substantial government assistance from the Free State of Bavaria and the Federal Republic of Germany in 2008 and 2009. The European Commission ended the subsequent aid case against BayernLB on 25 July 2012 and approved the aid received under certain conditions. The EU decision provides for, among other things, the repay-ment of around EUR 5 billion in aid to the Free State of Bavaria, a balance sheet reduction of around 50% from the level in 2008 as well as the sale of shares or interests in companies. The sale of Banque LBLux in a bidding process was initiated in January 2013. The notice of sale was published on 31 January 2013. The aim is to find a solid investor for Banque LBLux who will acquire 100% of the share capital and maintain the company’s successful business model and its long-term customer relationships. As described in the letter of comfort provided, BayernLB will also ensure that Banque LBLux is refinanced by the time any sale takes place. The refinancing may also take place beyond the time of the sale under compa-rable economic conditions.

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Earnings and liquidity positionIn the coming year, the overall earnings situation of Banque LBLux will greatly depend on the sale process, as well as on economic develop-ments and their impact on the expected risk provisioning.

Developments in business operationsIn the coming year, Banque LBLux will continue to work on its customer-centred business model.

It will consistently build on the development of its successful position-ing in Private Banking & Wealth Management in 2013; to this end, more measures specifically aimed at the acquisition of direct clients, savings banks, institutional partners and mandates in the custodial banking sec-tor will be implemented. The solid performance of asset management (especially Active Mandate) in the 2012 financial year will be used to increased volume.

In Corporate Banking, LBLux intends to further expand its bilateral Benelux business in corporate finance for higher-end medium-sized busi-nesses and in the area of secured real estate and project financing in 2013. Banque LBLux will make increased use of its established network with major players in the Benelux region in order to intensify the marketing of its entire range of products based on cross selling.

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Compliance with disclosure requirements on financial instruments and on establishing a form of risk reporting must be observed in accordance with IFRS 7.

IFRS 7 relates to all risks arising from financial instruments. In accord-ance with IFRS 7.31, Banque LBLux must produce information that makes it possible for the recipients of the report to assess the type and extent of risks arising from financial instruments and those risks to which Banque LBLux was exposed on the reference date for the accounts. The risks covered by IFRS 7.33 to 7.42 typically include credit risk, liquid-ity risk and market price risk. Apart from the report being presented on the basis of the IFRS details (Balance Sheet Approach), there is also information passed on internally to the Management Board and its com-mittees (Risk Committee, Supervisory Board, General Meeting) (Manage-ment Approach) for risk management purposes, published for external risk reporting purposes.

Organisation

The structural and procedural organisation of risk management within Banque LBLux is the responsibility of the Management Board. The Chief Risk Officer (CRO) of Banque LBLux was named to the CSSF and bears responsibility for the risk management function. He is a member of the Group CRO Board of BayernLB, which develops draft resolutions that are of importance for the BayernLB Group’s risk management for the Group’s Management Board and the responsible committees of the sub-sidiary companies.

Risk report

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The function of the Group CRO Board also includes the exchange of infor-mation on the relevant legal and regulatory developments along with tech-nological and competition developments, so that appropriate measures may be applied on a timely basis. The department heads of the Corporate and Private Banking department and of the Treasury department are re-sponsible for risk management within their own divisions. Within Banque LBLux, the Accounting & Controlling, Administration, and RO Credit Anal-ysis & Administration departments are responsible for the operational implementation of risk monitoring. In this respect, the core tasks of these departments are to provide a second opinion on counterparty risks and risk management and risk monitoring in respect of counterparty default, market price, liquidity and operational risks at portfolio level.

In accordance with regulatory requirements, the credit business of Banque LBLux already includes the clear structural division of the sales and back office functions, taking into account features specific to institutions – up to and including the level of the Management Board.

The Management Board of Banque LBLux is responsible for monitoring the risk absorption capacity and managing the risk capital required from an economic point of view, as well as for monitoring compliance with the supervisory requirements for the Bank’s regulatory capital requirement. Independent reporting, presented to the Management Board and the com-mittees on a timely basis and appropriately for the risks, is guaranteed for credit and country risk, market price risk, liquidity risk, investment risk and operational risk.

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The Audit Division audits Banque LBLux’s business operations and reports directly to the Management Board. Its auditing activities are based on a risk-oriented auditing approach and extend to all activities and processes that take place within Banque LBLux. It carries out its assigned tasks in-dependently of the activities, processes and functions to be audited and takes account of the applicable legal and supervisory requirements.

As part of Group-wide risk management, the Internal Audit Division of BayernLB also supplements the activities of the Internal Audit Division of Banque LBLux S.A. The audits carried out by BayernLB’s Internal Audit Division are conducted as supplementary audits or joint audits.

Risk management and monitoring

Banque LBLux is tied into the risk management and monitoring system of BayernLB. Accordingly, the risks are managed and monitored across all business areas with the aim of optimising its risk/return profile and safe-guarding its risk absorption capacity at all times.

Banque LBLux applies the following key principles in managing risk overall:• Risk and equity capital strategy is set by the Management Board in

line with business strategy and specified in policies and business objectives for each type of risk. The Management Board is also re-sponsible for, and monitors, its implementation.

• Clearly defined processes and organisational structures are in place for all types of risk around which all written process descriptions (tasks, competencies and responsibilities) are arranged.

• Sales and back office activities, as well as Treasury and trading and

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settlement/monitoring units are organisationally separate to avoid conflicts of interest.

• Suitable compatible procedures are defined and implemented within Banque LBLux to identify, measure, group, manage and monitor the various types of risk.

• Appropriate limits are set on all key types of risk and are actively moni-tored.

Capital management

Banque LBLux bases its capital management on a planning process that draws together strategic, risk-oriented and supervisory aspects within the context of a plan covering several years and an operational plan for the respective (following) financial year.

The strategy will be submitted to the Supervisory Board for approval or, if considered appropriate, will be adjusted accordingly.

Based on Internal Capital Adequacy Assessment Process (ICAAP) re-quirements, each business area in Banque LBLux is allocated economic risk capital and regulatory capital in the form of required reported equity.

Regulatory capital adequacy (solvency)

In accordance with Article 56 of the Law of 5 April 1993 on the Finan-cial Sector and CSSF Circular 2006/273 on capital adequacy, banks must have available adequate equity to cover the credit risks arising from their transactions outside the trading portfolio, currency risks arising from all transactions, operational risks and the risks arising from the transactions in the trading portfolio.

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In 2012, the regulatory solvency coefficient in accordance with the IRB approach was above 15% at all times and thus significantly higher than the minimum of 8% stipulated by regulators.

Banque LBLux continues to have solid capital resources. The core capital rate as at 31 December 2012 was 13.1%. The solvency coefficient stood at 21.85%.

Economic capital (risk absorption capacity)

In addition to complying with regulatory capital requirements, another key component of Banque LBLux’s risk management is safeguarding the economic risk absorption capacity.

In respect of economic compliance with risk absorption capacity, capital is defined on the basis of risk cover funds, as at BayernLB. The individual positions serving as the cover pool arise out of Banque LBLux’s mixed concept of balance-sheet and income statement values. Any losses that might occur on the basis of economic risk measurement should be offset against all of the asset values actually in place. The cover pool includes both items of capital stock available at short notice or that can be realised as profit during the financial year, as well as reserves available over the long term and subject to lesser degrees of volatility. The liquidity cover pool and the available cover pool are derived from the cover pool.

The liquidity cover pool describes capital that is available in the event of liquidation to service priority creditors. It is calculated from the cover pool taking into account various deductions (including unrealised losses from LaR).

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The available cover pool is the liquidity cover pool less the buffer for ad-ditional risk types (including reputational risks and the liquidity price risk).

The basis for the allocation of risk types is the share of the available cover pool that may be allocated with the risk capital requirement in ICAAP in accordance with the risk strategy.

The risk capital is allocated during annual planning in line with the strate-gic and operational goals of Banque LBLux at the level of the risk type, taking into account the risk appetite and risk profile outlined in the risk and equity strategy.

The Bank’s target risk profile is monitored within the reporting on risk absorption capacity as part of the management of economic risk capital. Risk absorption capacity is ensured by constant reconciling of the avail-able cover pool and risk capital requirements.

The Value at Risk (VaR) method is generally used to calculate risk capital requirements by risk type in the so-called ICAAP case (with the exception of investment risk and operational risk). The level of confidence is 99.95%.

The primary aim of the methodological orientation of the control model for risk absorption capacity is to protect priority creditors in the event of liquidation. With regard to liquidity, this risk absorption capacity is supplemented by a going-concern perspective. This approach is used

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to analyse capital adequacy in terms of the business model’s ability to continue as a going concern in the event of a loss that is statistically expected only once within the planning horizon. Stress tests (including inverse stress tests) and sensitivity analyses are conducted for an in-depth and forward-looking analysis of economic capital adequacy.

In addition to quantifying the main types of risk, in the ICAAP case, Banque LBLux calculates ICAAP stress, in which the effects of a “seri-ous economic downturn” on risk absorption capacity are studied.

As at 31 December 2012, the economic risk capital requirement (incl. stress) stood at EUR 286 million. Taking account of an available cover pool of EUR 712 million, the ICAAP coefficient (risk capital requirement from the ICAAP stress test/available cover pool), at 40%, was below the specified upper limit of 75%.

Credit (counterparty) risk

Credit risks are the biggest risks for Banque LBLux in terms of amount.

Risk strategyCredit risks (counterparty risks) arise from transactions or positions that result in a claim against a borrower, issuer of securities or counterparty. Any failure by them to meet their obligations results in a loss for the Bank equal to the amount due but not paid less the value of the realised

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collateral and reduced by the recovery rate for the unsecured part. The definition covers not only debtor and guarantee risks from the credit busi-ness but also issuer, replacement and settlement risks from the trad-ing business. Country risk and investment risk, which are other types of counterparty risk, are monitored within Banque LBLux as follows:

Country risk is covered through the use of Foreign Currency Ratings within the credit risk and is accordingly not shown again separately. Due to the relative insignificance of the investment risk – Banque LBLux has only one significant investment, i.e. LB-Re S.A. – this can be calculated by applying a simple procedure and is excluded from any further consid-eration here.

Parameters are formulated and specified for the development of credit business through the risk and equity strategy on the basis of business orientation and risk absorption capacity. They are complemented by ad-ditional business instructions and specific instructions.

Credit decisions are taken by the Risk Committee, Credit Committee or Management Board of Banque LBLux, as appropriate, in accordance with the rules on responsibility for credit specified by the Supervisory Board.

Risk is measured at a portfolio level as part of risk absorption by the CreditRisk+ model, which takes account, inter alia, of concentrations and correlations of sectors and business partners with each other. Besides the expected loss, it is particularly used to calculate unexpected loss and risk capital requirements in the risk absorption capacity calculation described.

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Internal rating systems In corporate customer credit analysis, BayernLB’s Global Format bal-ance sheet analysis system, to which Banque LBLux has access, pro-vides the key quantitative input factors for determining credit ratings, thereby supporting the credit analysis workflow and the integrity of the rating factor data. It can also be used to compare peer groups and sec-tors and is supplemented by a planning component.

Banque LBLux uses multiple statistically-based rating procedures to analyse and assess the creditworthiness of each borrower, these also being used by BayernLB, inter alia. Borrowers are assigned to the ap-propriate rating category in a 25-tier master rating system based on the probability of default.

All rating procedures are subject to annual validation. The validation process is a requirement under SolvV (German Solvency Ordinance) and involves both quantitative and qualitative analyses. Based on sta-tistical and qualitative analyses and user feedback, it assesses rating factors, selectiveness and calibration of procedures, data quality and model design.

To ensure the models correctly determine default probabilities in the re-spective customer/financing segments, further refinements are carried out both by BayernLB itself and in cooperation with RSU Rating Service Unit GmbH & Co. KG and Sparkassen Rating und Risikosysteme GmbH.

On 1 January 2007, BayernLB obtained regulatory approval to use the Internal Rating Based Approach (IRBA) to measure capital requirements for credit risks under the foundation IRBA. The rating processes current-ly in use at Banque LBLux for Corporates, International Commercial Real

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Estate and Project Finance have received approval in this connection to apply the IRBA under the regulatory audit process and have formed part of BayernLB’s IRBA since 30 September 2009. Banque LBLux was granted approval for the leveraged finance rating process as part of the approval for the local IRBA for credit risk; BayernLB’s IRBA has been used for the borrowers rated using this rating tool since 30 September 2011.

The approval of the IRBA on 1 January 2007 gave Banque LBLux regu-latory approval to use internal ratings processes to measure capital re-quirements for credit risks in accordance with the foundation IRBA from the time of regulatory registration on 30 September 2011.

For the purposes of preparing local ratings in the corporate loan cate-gory, the CSSF approved the rating processes Corporates, International Real Estate Financing, Project Financing and Leveraged Finance.

In addition, the local IRBA approval was expanded to include Banque LBLux borrowers that fall within the scope of the BayernLB ratings systems Banks and Insurers, International Local Authorities as well as Countries and Transfers and for whom Banque LBLux assumes the ratings prepared by BayernLB.

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Risk limitationThe data set used to monitor counterparty risk is represented in the core banking system MIDAS. There are regular internal evaluations of coun-terparty risk. Large risks are also managed in line with the regulatory framework on large exposures.

In order to ensure sufficient granularity of the credit portfolio, reporting on the management of concentration risks and large exposures has been introduced, among other features. In accordance with the “Concentration and large risk management concept”, the concentration limit for borrower entities at LBLux S.A. is EUR 40 million.

Collateral Another important way in which risks can be limited is by accepting and holding eligible forms of collateral. In reaching a decision on appropriate collateral, particular account is taken of the type of financing, borrower’s assets, their valuation and liquidity and a reasonable cost/benefit ratio (acceptance costs and ongoing evaluation). Collateral is processed and valued in line with the collateral policy set out in the rules on collateral of Banque LBLux.

Early warningAll exposures are constantly monitored in terms of their financial situ-ation, collateral, compliance with limits, contractual obligations and internal and external agreements. Exposures with heightened risks are detected early on using defined early warning indicators that

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form part of the early risk detection process. Problematic exposures are defined in terms of their risk content (special mention, substand-ard, doubtful and loss) and, if necessary, handled using an appropriate form of support (early warning signal <EWS>, intensive support or problem loan handling) and risk monitoring.

The principle underlying all activities is to minimise potential defaults for Banque LBLux or to avoid them completely by instigating appropri-ate measures early on through the provision of EWS/intensive sup-port or problem loan handling, thereby restoring a business partner to the normal level of support, where possible. A review is carried out regularly to assess the effectiveness of measures taken.

At Banque LBLux, reporting as part of the early warning system takes place by means of the Watch List distributed to the Management Board and the heads of the executive sections and back-office func-tions on a monthly basis.

Portfolio overview In the following portfolio overview, on the basis of the information con-tained in the IFRS accounts, Banque LBLux sets out the maximum cred-it risk as per IFRS 7.36 taking into account IFRS 7.B9. To this end, the gross book values were reduced by amounts calculated in accordance with IAS 32 and costs associated with impairment of assets in accord-ance with IAS 39.

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Maximum credit risk of Banque LBLux(Balance Sheet Approach)

In millions of EUR 31.12.2012 31.12.2011

Cash reserves 91.6 54.8

Loans and receivables 91.6 54.8

Loans and advances to banks 608.5 605.8


Fair value option 21.7 59.6

Loans and advances to customers 2,213.4 2,647.9

Loans and receivables 2,178.5 2,535.9


Assets held for trading (without equity capital positions) 83.0 157.6

Held for trading 83.0 157.6

Pos. market values from derivative financial instruments (Hedge Accounting) 0.0 0.0

Held for trading 0.0 0.0

Investment assets (without equity capital positions) 1,395.1 2,864.0

Available for sale 1,119.6 1,642.9



Contingent liabilities 110.7 136.6

Irrevocable credit commitments 1,151.3 1,180.5

Total 5,653.6 7,647.2

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In the reporting year, the maximum credit risk exposure of Banque LBLux was reduced by EUR 1,993.6 million (-26.1%). The following tables pre-sent the credit risk in accordance with the Management Approach.

Credit risk by regions (Management Approach)


Europe 5,116.2 6,971.6

of which Benelux 3,611.1 4,237.9

of which Germany 702.3 1,337.2

North America 144.7 207.0

Africa 16.0 0.0

Asia 9.8 14.6

Australia/Oceania 11.3 15.5

Total 5,298.0 7,208.7

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Credit risk by sector groups (Management Approach)


Automotive 131.4 122.2

Aviation 65.8 79.6

Banks 1,308.8 2,545.4

Renewable Energies 9.7 18.7

Chemicals 197.6 205.4

Construction 282.5 281.1

Consumer Durables 54.1 15.0

Food + Beverages 214.6 367.0

Gas 4.1 6.0

Hotels 27.7 28.9

Logistics 99.0 95.3

Manufacturing + Engineering 111.7 44.0

Media 55.5 87.9

Metals + Mining 87.1 155.7

Oil 73.5 120.5

ABS Portfolios 69.8 154.4

Pharmaceuticals 40.0 40.0

Real Estate 1,295.0 1,446.2

Wholesale and Retail Trade 51.8 102.4

Sovereigns 308.1 475.0

Steel 36.8 50.0

Technology 222.0 238.3

Telecom 10.5 28.1

Textiles + Apparel 58.0 58.3

Tourism 0.0 5.5

Utilities 97.6 47.8

Private Clients 385.1 390.0

Total 5,298.0 7,208.7

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Credit risk by rating (Management Approach)


Investment grade

0-7 1,906.5 3,721.3

8-11 1,996.0 2,250.8

Non-Investment grade

12-17 838.2 656.8

18-21 51.6 48.6

without Rating (private clients) 385.1 390.0

Default classification 22-24 120.6 141.2

Total 5,298.0 7,208.7

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Individual risk provisionsThe risk provisions for financial instruments in the category “Loans and Receivables” is shown as a separate item on the assets side; it includes specific loan loss provisions for reported transactions. Client relation-ships are analysed at regular intervals for the calculation of risk provisions.

The calculation of the risk provisions (impairment test) generally in-volves the following steps:• The amount and time of expected future repayments (= cash flows,

including cash flows from the sale of collateral, from other payment sources, etc.) must be estimated and discounted at the effective inter-est rate of the loan at the time of the impairment.

• The original contractually-agreed interest rate is used as the “effective interest rate” for the restructuring of problem loans, not the interest rate defined in the restructuring agreement.

• For floating-rate loans, the agreed margin that was valid on the day of the impairment calculation is used for the calculation. The refinancing rate is adjusted annually.

In addition to the method of calculating the “remaining value”, the value of a loan may also be calculated on the basis of observed and liquid mar-ket prices on an active market.

All assumptions involved in the calculation must be adequately and clearly documented in writing.

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Details on the impairment of securities under IAS are provided below:

Under IFRS, the term “impairment” refers exclusively to counterparty de-fault risk. For financial assets accounted for at fair value, changes in value resulting from market price risk are taken into account upon valuation and for assets accounted for at amortised cost they are not considered relevant.

The rules that apply to accounts receivable are applied in a similar way for the establishment of the impairment of securities, i.e. the presence of one or more so-called “objective indicators” (impairment triggers) on the bal-ance sheet date.

Unrecoverable receivables are written-off; this is generally done by making use of individual loan loss provisions that have already been created. The expense of allocations to risk provisions, income from writing them back and receipts on receivables that have been written off are recorded in the

“Risk provisioning – lending” item in the income statement.

For the purposes of risk provision, on 1 January 2005 Banque LBLux signed a credit insurance agreement with TCRe S.A., Brussels, Belgium. TCRe S.A. reinsures this agreement with Banque LBLux’s 100% owned subsidiary LB-Re S.A. In each individual case the decision is taken as to whether any specific loan loss provisions are covered by the credit insur-ance and subsequently by LB-Re, or directly by Banque LBLux. In this case, only an excess of 5% remains on the Banque LBLux books.

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Non-performing and in default classificationsDefault criteria form part of the rating system within the rating process. They correspond to the definitions in the German Solvency Ordinance under which “loans in default” fall within rating class 22 and “non-per-forming loans” within rating classes 23 and 24.

In the balance-sheet item loans and advances to customers, the Bank showed financial assets of EUR 110 million in the reporting year, which were written down and assigned to the IFRS category loans and receiva-bles. In connection with these written-down assets, there are also irrevo-cable loan commitments in place totalling EUR 2.3 million.

Depending on the type of financing, the impaired commitments are hedged in a manner that is typical for such transactions and market practice.

For a commitment which was sold in January 2013 because of strategic considerations, a corresponding provision in the amount of EUR 1.1 mil-lion was formed in 2012. This was made necessary by the price reduction for the completed sale.

For a commitment that is expected to be replaced in the first quarter of 2013, an impairment of EUR 7.1 million was reversed.

A risk provision in the amount of EUR 14.2 million was transferred from the Bank to LB-Re.

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Portfolio loan loss provisionsA portfolio loan loss provision of EUR 2.6 million was formed in 2012. No collective impairments for individual items were recognised. In 2012 there were no financial assets overdue but not written-down.

Risk provisioningSufficient risk provisions were established for all identified risks in the credit business. The principles of identification, classification and loan-loss provisioning for problem loans are applied for the purposes of han-dling, valuing and reporting on loans under threat of default.

RenegotiationsIn the financial year an adjustment was made to financial covenants for four borrowers with an exposure of EUR 46.5 million (corresponding to 0.8% of the maximum credit risk of EUR 5,653.6 million) as at 31 December 2012 (previous year: EUR 46.2 million), for whom no risk provision was formed as at 31 December 2012. The interest for the four borrowers in the financial year amounted to EUR 3.2 million.

Investment risk

Risks may arise not only from counterparties but also from investments (shareholder risk). They include anticipated losses on equity provided, li-ability risks (e.g. letters of comfort) or risks from profit and loss transfer agreements (loss transfers).

Banque LBLux has only one significant investment, the 100% owned sub-sidiary LB-Re. This is used by Banque LBLux exclusively for the purposes of creating risk provisions and subsequently the settlement of claims to the initial insurer with which Banque LBLux has signed the corresponding insurance contracts. As a result of the 100% shareholding, Banque LBLux can also control which claims are presented to the reinsurance company and which are not.

Risk strategyAccepting an investment risk requires a limit that has been approved by the risk committee and the Supervisory Board of Banque LBLux. Share-holder authorisation requirements must be complied with, if applicable. The precondition for approval is a prior analysis and risk classification and requires a front-office and an independent back-office vote. If in-vestment risks contain strategic aspects, the back office vote may be dispensed with.

The systematic acquisition of investments is not part of the business policy of Banque LBLux.

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Country risk

Country risk is the risk that a business partner in a particular country or the country itself is unable to meet its obligations at all or on time because of official measures or economic/political problems.

Risk strategyAccepting a country risk requires a limit that has been approved by an authorised party. The precondition for approval is the analysis of the country and the production of a rating (with the exception of de minimus thresholds).

Banque LBLux plays a part in the Group-wide limitation of country risks within the BayernLB Group.

Country risks must be monitored constantly to ensure recoverability. Where recoverability is no longer certain, an appropriate risk provision must be created and regularly monitored.

Risk measurementCountry ratings are a key tool for measuring individual country risk. A 25-tier rating scale is used. Country ratings are calculated centrally by an independent analysis unit in the Credit Analysis division – Country Risk & Industry Analysis Department of BayernLB, revised at least annually and modified where necessary. Country risk is assessed by analysing the economic and political situation in each country, particularly its ability to service its debt using quantitative and qualitative data. Ratings of key emerging markets and politically unstable countries are also continually monitored. The same country ratings as used by BayernLB are also used by Banque LBLux.

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Market price risk

Market price risk relates to potential losses from changes in market pric-es. Market price risks may arise from securities (and quasi-securities products), money market or foreign-exchange products, commodities, derivatives, currency or earnings hedging, quasi-equity funds or asset/ liability management.

Risk strategyRisk strategy lays down the strategic principles for dealing with market price risks. These may only be assumed within approved limits and must be constantly measured and monitored. They are entered into to execute and hedge client transactions, for the disposition of Treasury transactions and overall bank management, and as part of liquidity management. The basis for entering into market price risks – even with closed positions – is a product introduction process for the underlying products.

Market price risk modelBanque LBLux measures market price risk as part of daily monitoring using a value-at-risk (VaR) method based on a one-day holding period and confidence level of 99%. To determine the risk capital require-ment for the risk absorption capacity calculation, the figures are input at a uniform confidence level of 99.95%, assuming a special holding period for each type of risk.

The VaR method requires certain general restrictions, such as that• a confidence level of 99% does not cover losses that exceed the VaR

with a one-percent probability, • the calculations are based on daily closing levels and thus do not re-

flect any intra-day changes,

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• extraordinary future events are not covered by the use of historical data as the basis for calculation,

• the VaR is dependent on the volatility of market prices, • in the risk absorption capacity calculation, the use of special holding

periods in the calculation of the VaR is subject to the assumption that the market risk level can gradually be reduced even if losses occur.

The reliability of the market risk measuring procedures is reviewed regularly with respect to the quality of the individual risk procedures. In the backtesting process, the risk forecast is compared with the actual results (profit or loss).

In addition to VaR, used to assess potential losses under normal mar-ket conditions for monitoring purposes, forward-looking analyses are carried out based on extreme market conditions. This involves expos-ing market positions to atypical market price fluctuations and crises in a series of stress tests and then analysing the simulated results to identify any hazardous risk potential. Stress test scenarios are re-ported and modified where necessary as part of the risk absorption capacity report.

Interest-rate risk from investment book portfolios is calculated and integrated into the daily monitoring by Market Risk Controlling using value-at-risk.

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A 200 basis point interest-rate shock scenario is also calculated for interest-rate risk in the investment book in line with CSSF Circular 08/338. The calculated changes in present value in accordance with CSSF Circular 08/338 are significantly below the outlier criterion of 20% in relation to the Bank’s equity, at around 7.5% of equity.

Risk limitationThe ICAAP limits regarding risk absorption capacity are approved by the Management Board. The limits for the daily monitoring (one-day holding period and confidence level of 99%) of market price risks are derived from the ICAAP limits. The Management Board decides on the exact allocation within its authority.

Risk managementMarket price risks are measured and monitored within Risk Controlling independently of trading by means of Group-compatible procedures. This unit also ensures risk transparency and regular reporting to those respon-sible for portfolios. Instances of limits being significantly exceeded are also included in the report submitted to the Management Board.

Banque LBLux’s market price risks including specific interest-rate risks averaged EUR 7.56 million in 2012 (VaR on a one-day holding period and 99% confidence level). It fluctuated between EUR 4.78 million and EUR 11.5 million over the course of the year. The average limit utilisation was 40.85%.

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Derivatives – risk limitationBanque LBLux uses derivative instruments to reduce market price risk (hedge/asset swap). Derivative instruments are integrated into the management systems for the market and counterparty risks.

Borrower risks are a subset of counterparty risk and entered separately from market price risk. The same applies to counterparty default risk from derivatives transactions

Liquidity risk

Banque LBLux defines liquidity risk as the risk of being unable to meet its payment obligations in full or on time. Liquidity risk also encompasses the risk that in the event of a liquidity crisis, funding can only be obtained at elevated market rates, or that assets can only be sold at a discount to market rates.

Risk strategy The objective of liquidity risk management is to ensure the solvency of Banque LBLux at all times as well as to comply with all relevant regula-tory liquidity requirements. To ensure that the Bank is always in a posi-tion to meet payments and obtain refinancing, Banque LBLux must at all times have sufficient levels of liquidity and access to liquidity.

The focus of liquidity management is on preventing liquidity bottle-necks. The liquidity policy agreed with the parent company sets out the content and organisational framework for managing and controlling liquidity risk.

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Within Banque LBLux there is an Asset Liability Committee (ALCO) consisting of the Management Board, the head of the Accounting & Controlling, Administration Department, the head of the Treasury and Securities Department, the head of Private Banking & Wealth Manage-ment and the specialist managers from Treasury and Risk Control. Its duties include, in particular: • managing and allocating the core resources liquidity and refinancing, • managing and allocating the core resources capital and accounting

structure management, • managing the risk and return profile (balance sheet and performance)

of the investments in the equity portfolio, • the initiation and resolution of policies covering the above topics, • and the taking of appropriate measures in the event of liquidity crisis

situations.

From both liquidity risk management and liquidity risk controlling, ALCO receives the appropriate reports in respect of the current and future liquidity situation, identifies a need for action and initiates con-trol measures.

Liquidity management and liquidity risk management are the responsi-bility of the Treasury division within Banque LBLux. This division man-aged the overall situational and structural liquidity of the Bank. The production of liquidity overviews and other reports of relevance to liquidity and risk control for liquidity risks is handled within the Risk Control division as part of a Group-compatible system.

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Risk measurementThe key method applied to measure, analyse, monitor and report on liquidity risk is the liquidity overview. It compares liquidity gaps from de-terministic and modelled future cash flows with the realisable potential liquidity coverage in specifically defined maturity bands. Potential liquid-ity coverage measures, both in terms of volume and timing, the ability to obtain cash in the shortest possible time at market rates. The most important components of potential liquidity coverage are free access to central bank deposits and the availability of additional collateral eligible for refinancing at the central bank.

As a subsidiary of BayernLB and being tied into the general system of monitoring of liquidity throughout the Group, Banque LBLux monitors and manages its liquidity based on a variety of scenarios.

Risk managementOn the basis of the liquidity overviews, key figures are calculated, such as the percentage utilisation of the liquidity cover potential for the various scenarios, and, in addition, two key figures are calculated for a time-to-wall in a combination scenario consisting of bank and market stress. This allows a compressed assessment of the liquidity situation.

Regular analyses and monitoring of the diversification within liquidity risk are also carried out by means of analyses of funding sources produced monthly.

In 2012, Banque LBLux continued to hold an appropriate level of collat-eral inventory of tenderable securities which was eligible, when required, for tender on deposit with BCL (Banque Centrale de Luxembourg) or as

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part of repo transactions. As at 31 December 2012, the available facility at BCL amounted to approx. EUR 122 million. In addition, in connection with repo transactions via Clearstream, there was free collateral in place in the amount of EUR 685 million.

In 2012, even during the ongoing crisis in the financial markets, access to short-term liquidity in the money market continued to be available. In addi-tion, the Group parent company, BayernLB, was at all times available to act as “lender of last resort”. A specific commitment to Banque LBLux from BayernLB was agreed in 2012 in the form of a money market agreement for EUR 600 million.

In financial year 2012, the liquidity coefficient required by the Luxembourg regulatory body (CSSF) was maintained at all times and at the end of the year stood at 41.65%, above the required lower limit of 30%.

Risk monitoringLiquidity risks are monitored in the form of liquidity analyses carried out consistently on the basis of, among other things, the liquidity over-views and potential liquidity coverage and making use of various sce-nario assumptions.

The liquidity overviews and other relevant reports such as the analysis of funding sources form part of the risk reports sent regularly to the Management Board, the ALCO and the responsible controlling units.

As part of Group management, liquidity is another aspect where Banque LBLux generally acts with the close and constant approval of BayernLB.

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Operational risk

Similarly to BayernLB, Banque LBLux defines operational risk (OpRisk) as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. This definition includes le-gal risks. Reputational risks are also included under operational risks. The definition does not include strategic risks.

Risk strategyBanque LBLux makes use – also within the context of the BayernLB Group – of a balanced set of instruments (incl. risk inventories) for manag-ing operational risks. In the first instance all of these instruments are used to identify, and as a rule also evaluate, operational risks. From these, suit-able measures appropriate to the risk from the point of view of costs and benefits are then derived.

With reference to a collection of loss data (standardised within the BayernLB Group), existing concrete sources of loss must be recorded systematically and assessed with reference to their direct effect.

OpRisk potentials must be calculated and assessed by means of quali-tative instruments applied on the basis of knowledge of procedures and systems.

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Risk measurementFor the purposes of local notification to the regulatory bodies, Banque LBLux uses the standard approach (STA) for the calculation of equity re-quirement for operational risk at the level of the Group and individual in-stitutions. Banque LBLux is included in the institutionalised OpRisk loss notification procedure for the BayernLB Group.

Disaster Recovery Plan/Business Continuity PlanFor the purposes of Disaster Recovery and Business Continuity plan-ning, there are set up within Banque LBLux a crisis management sys-tem (executive company management on the occurrence of extraordi-nary events) and an IT emergency plan.

Crisis management relates not only to the conceivable IT losses, but also takes risks and the causes of crises into consideration.

Banque LBLux defines a crisis as a situation or event that• significantly destabilises business processes,• exerts a negative influence on the Bank’s environment,• represents a threat to the existence of the Bank.

The events causing crises analysed under Priority 1 have been brought together under the heading “failure of IT system or communications over the longer term” (scenarios of relevance to crisis).

Banque LBLux’s operational risk and OpRisk management activities are regularly reported to the Management Board and BayernLB. The annual OpRisk report also contains details of risks and losses, and generally how operational risks are handled within Banque LBLux. An overview of claims is presented to the Management Board each quarter.

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As of the end of the reporting period, there were no notable potential OpRisk threats arising from legal risks.

Summary and outlook

With its profitable business segments, LBLux considers itself well po-sitioned and to be an attractive investment for interested market partici-pants. The priority remains the development of customer relationships with the professional commitment of the managers and employees of the Bank. Nevertheless, changes resulting from the conclusion of the sales process are not sufficiently foreseeable.

Banque LBLux has an effective and forward-looking risk management and controlling system that is continually modified to meet internal and external needs and new refinements in methodology.

The Supervisory Board extends its thanks to all Banque LBLux staff for their commitment and achievements in a difficult environment.

Luxembourg, February 2013

The Supervisory Board

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To the Board of Managers of Banque LBLux S.A., 3, rue Jean Monnet,L-2180 Luxembourg

Following our appointment by the Management dated September 13th, 2012, we have audited the accompanying financial statements of Banque LBLux S.A., which comprise the statement of financial position as at December 31st, 2012 and the statement of comprehensive income, statement of changes in equity and cash flow statement for the year then ended and a summary of significant accounting policies and other expla-natory information.

The Board of Managers is responsible for the preparation and fair pre-sentation of these financial statements in accordance with International Financial Reporting Standards as adopted by the European Union, and for such internal control as the Board of Managers determines is necessary to enable the preparation of financial statements that are free from mate-rial misstatement, whether due to fraud or error.

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Internatio-nal Standards on Auditing as adopted for Luxembourg by the Commission de Surveillance du Secteur Financier. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

Report on thefinancial statements

Board of Managers’responsibility for thefinancial statements

Responsibility of the Réviseurd’Entreprises agréé

Report of the Réviseurd’Entreprises agréé

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An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the judgement of the Réviseur d’Entreprises agréé, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the Réviseur d’Entreprises agréé considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.

An audit also includes evaluating the appropriateness of accounting poli-cies used and the reasonableness of accounting estimates made by the Board of Managers, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

71

In our opinion, the financial statements give a true and fair view of the financial position of Banque LBLux S.A. as of December 31st, 2012, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union.

The management report, which is the responsibility of the Board of Managers, is consistent with the financial statements.

Luxembourg, February 22nd, 2013

KPMG Luxembourg S.à r.l.Cabinet de révision agréé

W. Ernst

Opinion

Report on other legal and regulatory requirements

72

Income statement

for the period from 1 January to 31 December 2012 (in EUR ‘000)

Notes 2012 2011

Net interest income (22) 48,470 69,701

Interest income 153,898 230,362

Interest expenses -105,428 -160,661

Risk provisions for credit business (23) -2,249 -14,400

Net interest income after risk provisions 46,221 55,301

Net commission income (24) 17,879 18,618

Commission income 19,513 20,209

Commission expense -1,634 -1,591

Results from fair value measurement (25) 10,597 -2,676

Results from hedge accounting (26) -818 246

Results from investment assets (27) 3,595 -96,822

Administration expenses (28) -32,939 -30,736

Other results (29) -21,790 21,766

Earnings before taxes 22,745 -34,303

Income taxes (30) -6,944 11,271

Earnings after taxes 15,801 -23,032

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If a separate reference is not made, all amounts are stated in thousands of euro. For computational reasons, rounding differences can occur in the tables, of ± one unit.

Abbreviated statement of comprehensive income


2012 2011

After-tax earnings as per the income statement 15,801 -23,032

Other earnings recorded with no effect on the income statement

Changes in the revaluation surplus 65,625 1,608

Valuation change 65,625 1,608

Other pre-tax earnings -18,708 1,242

Income taxes with no effect on the income statement -18,708 1,242

Other after-tax earnings 46,916 2,850

Total overall earnings recorded with and without an effect on the income statement 62,717 -20,182

The Notes are an integral part of these financial statements.

74

Balance sheet

Assets

as at 31 December 2012 (in EUR ‘000)Notes 31.12.2012 31.12.2011

restated

Cash reserves (6, 31) 91,630 54,767

Loans and advances to banks (7, 32) 605,402 605,823

Loans and advances to customers (7, 33) 2,238,705 2,688,373

Risk provisioning (8, 34) -25,288 -40,483

Assets held for trading (9, 35) 82,996 157,571

Investment assets (11, 36) 1,395,080 2,863,962

Property, plant and equipment (12, 37) 27,870 29,023

Intangible assets (13, 38) 4,054 3,345

Income tax assets (21, 39) 21,448 47,114

deferred 17,698 43,364

current 3,750 3,750

Other assets (14, 40) 34,200 32,544*

Total assets 4,476,097 6,442,039

* Adjustment of previous year’s value by EUR 731,000 in accordance with IAS 8, see Note (2, 46). The Notes are an integral part of these financial statements.

75

Liabilities

as at 31 December 2012 (in EUR ‘000)Notes 31.12.2012 31.12.2011

restated

Liabilities to banks (15, 41) 1,900,220 3,017,677

Liabilities to customers (15, 42) 1,656,626 1,527,474

Securitised liabilities (15, 43) 9,655 993,543

Liabilities held for trading (16, 44) 92,172 188,572

Negative market values (fair values) from derivativesfinancial instruments (hedge accounting)

(17, 45) 80,424 79,047

Provisions (18, 46) 1,618 1,100

Income tax liabilities (21, 47) 4,037 4,051

current 3,241 3,241

deferred 796 810

Other liabilities (19, 48) 13,279 10,859

Subordinated capital (20, 49) 286,707 249,819

Equity (50) 431,359 369,898

Subscribed capital 300,000 300,000

Capital reserve 140,982 142,237*

Revaluation surplus -25,424 -72,340

Net profit or loss for the reporting period 15,801 –

Total liabilities 4,476,097 6,442,039

* Adjustment of previous year’s value by EUR 731,000 in accordance with IAS 8, see Note (2, 46). The Notes are an integral part of these financial statements.

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Statement of changes in equity


Subscribed capital

Capital reserve

Revenue reserves

Net profit or loss for

the period

Revaluation reserve

Equity

As at 31 December 2011 300,000 120,627 20,880 -72,340 369,166

Adjustments in accordance with IAS 8 1 731 731

As at 1 January 2012 300,000 120,627 21,611 0 -72,340 369,898

Change in revaluation surplus 46,916 46,916

Net income 15,801 15,801

Dividends paid

Discontinuation/withdrawal of reserves 2 -1,255 -1,255

As at 31 December 2012 300,000 120,626 20,356 15,801 -25,424 431,359

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Bal

ance

sh

eet


Subscribed capital

Capital reserve

Revenue reserves

Net profit or loss for

the period

Revaluation reserve

Equity

As at 31 December 2011 300,000 120,627 20,880 -72,340 369,166

Adjustments in accordance with IAS 8 1 731 731

As at 1 January 2012 300,000 120,627 21,611 0 -72,340 369,898

Change in revaluation surplus 46,916 46,916

Net income 15,801 15,801

Dividends paid

Discontinuation/withdrawal of reserves 2 -1,255 -1,255

As at 31 December 2012 300,000 120,626 20,356 15,801 -25,424 431,359

1 Adjustments according to IAS 8 concern pension provisions, which are explained separately in the Notes. 2 In the reporting year, the Bank made voluntary use of IAS 19 (rev. 2011); the removal of retai-ned earnings is explained in the Notes. The Notes are an integral part of these financial statements.

For computational reasons, rounding differences can occur in the tables, of ± one unit.

78

Cash flow statementfor the period from 1 January to 31 December 2012 (in EUR ‘000) 2012 2011

Annual net income before taxes 22,745 -34,303

Items in annual net income not affecting the cash flow andcarryforwards to cash flow from operating activities

Depreciation, impairments and write-ups on receivablesand property, plant and equipment

-1,897 109,758

Changes to provisions 1,015 496

Changes to other items not affecting cash flow 87,409 9,675

Other adjustments (net) -276 -1,792

Net interest -48,470 -69,701

Sub-total 60,526 14,133

Changes to assets and liabilities fromoperating activities

Loans and advances to

banks 421 47,977

customers 432,224 514,941

Securities (unless investment assets) and derivatives -21,825 -19,360

Other assets from operating activities -2,386 -1,166

Liabilities to

banks -1,117,457 -1,968,057

customers 129,151 36,149

Securitised liabilities -983,888 -12,380

Other liabilities from operating activities 2,421 3,459

Cash flows from hedging derivatives 559 18,413

Interest and dividends received 165,702 241,361

Interest paid -116,958 -170,991

Income tax payments 0 -4,607

Cash flow from operating activities -1,451,510 -1,300,128

79

Bal

ance

sh

eet

2012 2011

Cash inflow from the sale of

Investment assets 1,518,881 1,894,298

Property, plant and equipment 0 0

Cash outflow for the acquisition of

Investment assets -50,000 -545,000

Property, plant and equipment -662 -660

Intangible assets -2,027 -1,910

Cash flow from investment activities 1,466,192 1,346,728

Cash inflow from allocations to equity 0 0

Disbursements to company owners 0 -30,103

Changes in cash resulting from subordinated capital (balance) 22,181 -22,181

Cash flow from financing activities 22,181 -52,284

Cash and cash equivalents at the beginning of the financial year

54,767 60,451

+/- Cash flow from operating activities -1,451,510 -1,300,128

+/- Cash flow from investment activities 1,466,192 1,346,728

+/- Cash flow from financing activities 22,181 -52,284

Cash and cash equivalents at the end of the financial year 91,630 54,767

The Notes are an integral part of these financial statements.

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Notes

1Notes to the company financial statements of Banque LBLux S.A.

2Accounting policies(1) Basic principles(2) Changes year on year(3) Currency translation(4) Offsetting(5) Financial instruments(6) Cash reserves(7) Receivables(8) Risk provisioning(9) Assets held for trading(10) Positive market values (fair values) from derivative financial instruments (hedge accounting)(11) Investment assets(12) Property, plant and equipment(13) Intangible assets(14) Other assets

(15) Liabilities(16) Liabilities held for trading(17) Negative market values (fair values) from derivative financial instruments (hedge accounting)(18) Provisions(19) Other liabilities(20) Subordinated capital(21) Current taxes

3Notes to the statement of comprehensive income(22) Net interest income(23) Risk provisions for credit business(24) Net commission income(25) Results from fair value measurement(26) Result from hedge accounting (27) Results from investment assets(28) Administration expenses(29) Other results(30) Income taxes

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4Notes to the balance sheet(31) Cash reserves(32) Loans and advances to banks(33) Loans and advances to customers(34) Risk provisions(35) Assets held for trading(36) Investment assets(37) Property, plant and equipment(38) Intangible assets(39) Income tax assets(40) Other assets(41) Liabilities to banks(42) Liabilities to customers(43) Securitised liabilities(44) Liabilities held for trading

(45) Negative market values (fair values) from derivative financial instruments (hedge accounting)(46) Provisions(47) Income tax liabilities(48) Other liabilities(49) Subordinated capital(50) Equity

5Notes to the financial instruments(51) Fair value of financial instruments(52) Financial instrument valuation categories(53) Reclassification of financial assets(54) Derivatives transactions

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6Notes to the cash flow statement(55) Notes to items in the cash flow statement

7Supplementary information(56) Assets and liabilities in foreign currency(57) Assets pledged as collateral(58) Transfer of financial assets(59) Contingent liabilities and other liabilities(60) Trust activities(61) Other financial obligations(62) Letter of comfort(63) External auditors‘ fees(64) Employees(65) Related party disclosures

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Banque LBLux S.A. was incorporated on 7 June 1973 as a public lim-ited liability company (“société anonyme”) in accordance with Luxem-bourg law. 100% of the shares of LBLux S.A. (hereinafter “the Bank” or LBLux) are held by Bayerische Landesbank (BayernLB) of Munich. The object of the company is to carry out banking and financial business for its own account and the account of third parties and all activities directly or indirectly related thereto. The registered office of the Bank is 3, rue Jean Monnet, L-2180 Luxembourg.

In accordance with Article 80 of the Law of 17 June 1992 and IAS 27.10, the Bank is exempted from the requirement to produce consolidated group accounts. As a subsidiary, LBLux is included in the consolidated group accounts of BayernLB. These consolidated group accounts are produced by BayernLB and can be obtained from the head office of the company at Brienner Strasse 18 in 80333 Munich, Germany.

LBLux financial statements for the 2012 financial year have been pre-pared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the EU. In addition to the IFRS defined standards, IFRS also comprise the International Accounting Standards (IAS) and the interpretations of the International Financial Reporting Interpretations Committee (IFRIC) and of the Standing Interpretations Committee (SIC).

For the financial year 2012, all standards and interpretations that are mandatory within the EU have been applied, insofar as they are relevant for the Bank.

The financial statements comprise the statement of comprehensive in-come, the balance sheet, the statement of changes in equity, the cash-flow statement and the Notes. The reporting currency is the euro.

The Supervisory Board of the Bank has approved the financial state-ments drawn up by the Management Board.

If a separate reference is not made, all amounts are stated in thousands of euro, rounded to two decimal places. For computational reasons, rounding differences can occur in the tables, of ± one unit. The amounts are generally stated without an arithmetical sign (±) if the context makes clear which sign is intended.

1 Notes to the company

financial statements of Banque LBLux S.A.

85

IFRS 8 (Business Segments) does not apply, since no debt or equity instruments issued by the Bank are traded on a public market.

(1) Basic principles

The Bank’s accounts are kept in accordance with the International Finan-cial Reporting Standards (IFRS), including all supplements, as applicable in the European Union. Recognition and measurement are carried out on a going concern basis.

The sale of LBLux in a bidding process was initiated in January 2013. The notice of sale was published on 31 January 2013. The aim is to find a solid investor for LBLux who will acquire 100% of the share capital and maintain the company’s successful business model and its long-term cus-tomer relationships.

Refinancing may also take place after the time of the sale under compa-rable economic conditions.

Income and expenses are recorded pro rata temporis and recognised in the period to which they are attributable.

Estimates and measurements required for accounting and valuation under IFRS are carried out in accordance with the respective standards. Under constant review, these are based on historical experience and other fac-tors, such as expectations of future events. Estimation uncertainties exist, particularly with regard to the evaluation of risk and other provisioning, deferred taxes, and determining the fair value of financial instruments.

An asset is capitalised when it is probable that the future economic ben-efits will flow to the Bank and the asset has a cost that can be measured reliably. A liability is capitalised when it is probable that an outflow of resources embodying economic benefits will result from its settlement and the amount at which the settlement will take place can be measured reliably.

2 Accounting policies

No

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Effects of amended and new IFRSThe revised standards and interpretations of IFRS 7 “Financial Instruments: Disclosures” with enhanced disclosure requirements for the transfer of financial assets, amendments to IAS 12 “Income Taxes” in relation to real estate held as an investment, and changes resulting from the annual im-provement project of the International Accounting Standards Board (IASB) must be taken into account for the first time in the reporting year. In addi-tion, the Bank made voluntary early application of IAS 19 “ Employee Benefits”, which was amended in June 2011, and whose application is required for the first time beginning with the financial year starting on 1 January 2013. The new regulations include provisions for recording actu-arial gains and losses and expanded disclosure requirements for defined benefit pension plans. These effects are presented in the Notes (46).

The IASB has also issued amended or new standards and interpretations, which are to be applied no earlier than the 2013 financial year:

• IAS 32 “Financial Instruments: Presentation” and IFRS 7 “Financial Instruments: Disclosures” related to the offsetting of financial assets and financial liabilities. Additional application guidelines provided more detailed information on the conditions for offsetting and new disclo-sure requirements related to certain settlement agreements were in-troduced. While the expanded disclosure requirements of IFRS 7 are to be applied for financial years beginning on or after 1 January 2013, the amendments to IAS 32 enter into force for financial years begin-ning on or after 1 January 2014. The specific effects of these amend-ments on the Bank’s financial statements are currently being analysed and cannot yet be estimated.

87

• IFRS 13 “Fair Value: Measurement”. The amendments include uni-form, cross-standard methods for measuring fair value and expanded disclosure requirements. The standard enters into force for financial years beginning on or after 1 January 2013. It is to be applied pro-spectively at the beginning of the financial year in which the new rules are adopted. Possible effects of implementation are currently being evaluated.

• IFRS 10, IFRS 11 and IFRS 12 were published in May 2011. These standards treat issues of consolidation requirements, the definition and accounting treatment of joint arrangements and the disclosure of type, risks and financial impacts of interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities (spe-cial-purpose entities). The amendments enter into force for financial years beginning on or after 1 January 2013. They will have no impact on the Bank‘s financial statements.

• In addition, the IASB published amended standard IAS 27 “Separate Financial Statements” in May 2011, which describes the accounting and disclosure requirements for separate financial statements issued by a parent company or a shareholder with joint control or significant influence over an investee. These amendments will also have no ef-fect on the financial statements of LBLux.

• The IASB also published amendments to IFRS 9 in December 2011, which postpone the initial mandatory application of IFRS 9 to financial years beginning on or after 1 January 2015. The effects of IFRS 9 are presented as part of a project to replace the existing IAS 39 “Financial instruments: Recognition and Measurement”.

No

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89

(2) Changes year on year

In the 2012 financial year, an adjustment in accordance with IAS 8.42 was made that has an effect on the statement of comprehensive income including the income statement, the balance sheet, the development of equity and the cash flow statement:

The Bank’s pension plan has been outsourced to an external provider and was presented in previous years as a defined contribution plan. Based on new information, the existing pension plan was reclassified in the report-ing year as a defined benefit plan in accordance with IAS 19. To improve transparency, the Bank also decided to make use of revised IAS 19 in the 2012 financial year. The effects are described in Note 18; for reasons of materiality, the Bank is not presenting the third comparison period.

Reconciliation in accordance with IAS 8 (in EUR ‘000) 31.12.2011 Adjustment 01.01.2012

Other assets 31,813 +731 32,544

Equity 369,166 +731 369,898


Capital reserve 141,506 +731 142,237


Net profit or loss for the reporting period – –

(3) Currency translation

The Bank‘s company capital is expressed in euro.

Assets and liabilities denominated in a currency other than the base cur-rency are recorded in the currency concerned and translated into the base currency at the exchange rate effective on the balance sheet date.

Income and expenses in other currencies are translated to the base cur-rency on a monthly basis.

Any valuation difference which may arise from the currency translation of spot positions hedged by forward transactions as well as forward po-sitions hedged by spot deals are not recorded in the income statement.

No

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90

Any valuation result (gain or loss) from non-hedged spot positions is recognised in the income statement. Any valuation result from non-hedged forward transactions is reported on a net basis by currency and recognised in the income statement.

(4) Offsetting

Receivables and liabilities are offset against each other if they relate to the same counterparty, are due daily and it has been agreed with the counterparty that interest and commissions are calculated as if only a single account existed.

(5) Financial instruments

A financial instrument is any contract that gives rise to a financial asset for one entity and a financial liability or equity instrument for another entity. Financial instruments are recognised in the balance sheet from the date on which the balance sheet entity becomes a contractual party either entitled to obtain consideration or required to provide consideration in return. Regular way purchases or sales of financial assets (regular way contracts) are recognised on the balance sheet and derivatives always at trade date. Other financial instruments are recognised at settlement date.

Under IAS 39, all financial instruments, including derivative financial in-struments, must be recognised in the balance sheet and assigned to valuation categories. Financial instruments are initially recognised at fair value, which is normally the purchase cost.

Premiums and discounts on the redemption value are amortised over the period.

91

No

tesFinancial instruments are subsequently measured according to

their assigned category as follows:a) Financial assets and liabilities at fair value through profit or lossThese relate to financial instruments and derivatives held for trading (not in hedge accounting), and to financial instruments not held for trading for which the fair value option (FVO) is applied.

They are measured at fair value and recognised under the result from fair value measurement. Realised and current income is also shown under this item. Current income from derivatives in economic hedges is rec-ognised in net interest income. Derivatives in economic hedges do not meet the hedge accounting criteria under IAS 39. They are used for risk management and have not been concluded for trading purposes.

Held for trading financial instruments are reported under assets held for trading and liabilities held for trading.

The fair value option is used to minimise or eliminate valuation-related inconsistencies and to avoid the separation of embedded separable derivatives. They are measured at fair value. The valuation results are recorded under the result from fair value measurement, and current in-come is reported as net interest income. Financial instruments to which the fair value option has been applied are mainly reported under loans and advances to banks/customers, investment assets, and liabilities to banks/customers. These are opposed to derivatives, or in one case, part of the securitised liabilities item.

b) Held to maturity investmentsThe Bank does not have any holdings in this category.

92

c) Loans and receivablesThese include non-derivative financial assets with fixed or ascertainable payments that are not listed on an active market and for which the fair val-ue option is not applied, or that are not designated as being in the “Avail-able for sale” category. These are measured at amortised cost. Current in-come is reported under interest income. These financial instruments are mainly reported under the cash reserve and loans and advances to banks/ customers. The treatment of impairments is described in the remarks on risk provisions (Note 8).

d) Available for sale financial assetsThese include any non-derivative financial assets (securities, participa-tions) that are classified as available for sale or are not assigned to any of the categories described. These are measured at fair value. Any differ-ence between fair value and amortised cost is shown as a separate item in equity (revaluation surplus) and not recognised in the income statement until the asset is either disposed of or is permanently impaired. Gains and losses on their sale and permanent impairment are reported under the re-sult from investment assets and current income in interest income. Avail-able for sale financial assets are regularly assessed for impairment. In do-ing so, a distinction is made between equity and debt instruments based on the underlying indicators. Equity instruments are classed as impaired if their fair value has significantly or permanently fallen below purchase cost. Debt instruments are classed as impaired if their fair value is below (amortised) cost and the loss of future interest or principal payments is expected on the balance sheet date. When there is no further reason for impairment, debt instruments are reversed on the income statement up to the value of the amortised cost. Reversals of equity instrument write-downs are recognised in the revaluation surplus without recognising in profit or loss. Available for sale financial instruments are reported under investment assets.

93

No

tese) Liabilities measured at amortised cost

Liabilities measured at amortised cost include financial instruments not used for trading purposes and where the fair value option is not used. They are measured at amortised cost. Current income is reported under interest expenses. Financial instruments included in this category are mainly recognised under liabilities to banks/customers, securitised liabili-ties and subordinated capital.

DerecognitionFinancial assets are derecognised if the contractual rights to cash flows from the respective assets have lapsed or if all risks and rewards have substantially been transferred. Financial liabilities are derecognised if the contractual liabilities are discharged, cancelled or expired.

Profit reportingThe net profit or net losses from the financial instruments in each cat-egory comprise current income (interest or dividends) as well as realised and unrealised gains or losses that are recognised under the items in the income statement/equity relating to their category defined above.

Fair valueThe fair value of a financial instrument is the amount for which it could be exchanged between knowledgeable, willing parties in an arm‘s length transaction.

Where possible, fair value is calculated by reference to a quoted price on an active market (e.g. stock market price). A market is considered to be active for a financial instrument if quoted prices are readily and regularly available from an exchange, dealer or similar, and these prices represent actual and regularly occurring market transactions between knowledge-

94

able, willing parties in an arm‘s length transaction. If no active market ex-ists, a valuation technique is used. The objective is to establish what the transaction price would have been on the measurement date in an arm’s length exchange between knowledgeable and willing parties. The data used must reflect all inherent market expectations. The best indicator of fair value for actual transactions in the same financial instrument carried out at similar times is the price at which the transactions were executed. If this is not possible, a comparison is normally made to the fair value of another instrument that is substantially the same.

Bonds are valued by means of market prices and market indications, or by means of benchmark bonds if these are not available. Benchmarks are also used for the valuation of items (promissory notes, loans and money-market transactions) in the fair value option.

Beyond this, the present value method is used for interest-bearing financial instruments. Valuation is based on cash flow structure, taking account of nominal values, residual maturities and the agreed interest calculation method.

Balance sheet items particularly affected are:• Loans and advances to banks/customers• Interest rate derivatives with positive fair value reported under assets

held for trading as well as hedging derivatives• Investment assets • Liabilities to banks/customers• Securitised liabilities• Interest rate derivatives with positive fair value reported under liabili-

ties held for trading as well as hedging derivatives

Options are valued on the basis of the Black-Scholes option pricing model.

95

No

tesFinancial instruments assessed at fair value are classified in the following

valuation hierarchies in accordance with IFRS 7.27:

In EUR ‘000

Level 1 Quoted market

prices 1

Level 2 Valuation based on market data 2

Loans and advances to banks 0 21,670

Loans and advances to customers 0 34,867

Assets held for trading 0 82,996

of which derivative financial instruments 0 82,996

Investment assets

Bonds, notes, and other fixed-interest securities 828,041 265,420

Equity participations 0 26,164

Liabilities to customers 0 36,636

Liabilities held for trading 0 92,172

of which derivative financial instruments 0 92,172

Negative market values (fair values) from derivativefinancial instruments (hedge accounting)

0 80,424

The hierarchies in accordance with Level 3, the valuation parameters for which are not based on observable market data, were not in existence on the reference reporting date.

No reclassifications took place in the reporting period.

1 Financial instruments are valued on the basis of quoted prices in active markets. These include derivatives traded on stock exchanges and other financial instruments with quoted prices.2 Financial instruments are priced by deriving a price from observable market parameters (market indication or valuation method taking account of observable market parameters) or are indirectly observable (derived from prices) and are not included under Level 1.

96

Embedded derivativesEmbedded derivative financial instruments, which are a component of structured products, are recognised on the balance sheet as independent derivatives and measured at fair value, when separation from the host contract is required. In such an instance, the host contract is recognised and measured according to its valuation category.

Hedge accountingInterest rate risks are managed using derivative financial instruments to hedge on-balance sheet assets. Hedges that meet hedge accounting cri-teria within the meaning of IAS 39 are currently restricted to fair value hedges in which an on-balance sheet asset is hedged against a change in fair value from the interest rate risk that could affect the result for the period. A high degree of effectiveness is needed here to ensure changes in the fair value of the hedged underlying transactions stay within a range of 80-125% of the hedged risk and the hedging derivative.

In the Bank, fair value hedge accounting is applied in the form of micro fair value hedges. Interest rate swaps are used as hedging instruments. Interest rate swaps used to hedge the fair value of on-balance sheet assets and liabilities are measured at fair value; any resulting changes in value are recognised in profit or loss. Carrying values of underlying transactions are adjusted in line with the results from the measure-ments attributable to the hedged risk and are recognised in profit or loss.

Derivative financial instruments in economic hedges (interest rate and currency swaps) that do not meet hedge accounting criteria are clas-sified as held for trading and valued according to their category. De-rivatives used to hedge the fair value of on-balance sheet assets and liabilities are measured at fair value. But unlike the current income and expenses of derivative financial instruments held for trading purposes, current income and expenses are reported under net interest income.

97

(6) Cash reserves

Cash reserves include cash and balances with central banks. They are recognised at nominal value.

(7) Receivables

Loans and advances to banks and customers are non-derivative finan-cial assets with fixed or determinable payments that are not quoted on an active market and not held for trading purposes. They are valued at amortised cost, provided they are not classified as available for sale and are not fair value option receivables or underlying transactions of an ef-fective fair value hedge. Premiums and discounts are spread over their term and reported under net interest income. Write-downs of receiva-bles in the loans and receivables category are reported separately under risk provisions and are offset against these assets.

Impairments on other holdings are recorded as direct reductions in the relevant asset values.

(8) Risk provisions

The risk provisions for credit products in the category “Loans and Re-ceivables” is shown as a separate item on the assets side; it includes specific impairments and portfolio impairments for reported transac-tions.

Client relationships are analysed at regular intervals for the calculation of risk provisions. Individual impairments are shown where there are objec-tive indications of an impairment affecting expected future payments received. The Bank determines and measures the size of an individual impairment as the difference between the book value of the receivable and the net present value of expected future payments received, as cal-culated by the discounted cash flow method applying the original effec-tive interest rate. If payment expectations change, the risk provisions are increased or written back accordingly. The change over time in the net present value of expected future payments received (known as unwind-ing) is recorded as interest income, and accordingly the interest payments actually received are not recorded in the net interest position.

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98

For securities in the available-for-sale category, the prerequisite for the es-tablishment of an impairment is the presence of one or more so-called “ob-jective indicators” on the balance sheet date (so-called impairment trigger).

The expense of allocations to risk provisions, income from writing them back and receipts on receivables that have been written off are recorded in the “Risk provisioning – lending” item in the income statement.

Additional explanations regarding the risk provisions can be gathered from the risk report.

(9) Assets held for trading

Assets held for trading include all financial assets held for trading and derivative financial instruments with positive market values not desig-nated as hedging instruments under hedge accounting criteria within the meaning of IAS 39. The value of assets held for trading plus realised gains or losses and current income are reported in the income state-ment under the result from fair value measurement, except for current income from derivatives in economic hedges, which are reported under net interest income.

(10) Positive market values (fair values) from derivative financial instruments (hedge accounting)

This balance sheet item contains derivative financial instruments with positive market values that are used as hedges and meet hedge account-ing criteria within the meaning of IAS 39. The derivative instruments are measured at fair value. Both changes in the fair value of the hedging instruments and changes in the fair value of underlying transactions that arise from the hedged risk are reported under the result from hedging transactions (hedge accounting). Interest income and expenses from hedging derivatives are reported under net interest income.

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No

tes(11) Investment assets

Investment assets include financial assets in the available for sale, loans and receivables and fair value option categories. Shares in unconsolidated subsidiary companies and unconsolidated affiliates are classified as

“Available for sale” and recorded under investment assets. Investment assets are measured according to their designated category.

(12) Property, plant and equipment

Property, plant and equipment comprise mainly land and buildings for own use, and operating and office equipment. Assets are valued at amortised cost, that is, their purchase or production costs are depreci-ated on a straight line basis. Depreciation on property, plant and equip-ment is reported in administration expenses. The depreciation is calcu-lated over the expected useful life. The following rates of depreciation are applied:

Buildings, installations ..................................................................... 2 - 10%Other tangible fixed assets ........................................................... 20 - 25%

Acquired assets with acquisition/production costs up to a maximum amount of EUR 870 (or equivalent amount in the base currency at the time of acquisition), or where the expected depreciable life does not exceed one year, are charged directly to the income statement for that business year. Tangible assets are examined every year for indications of a possible impairment.

(13) Intangible assets

Intangible assets include acquired software. Assets are valued at amor-tised costs, i.e. the purchase costs for depreciable assets are depreci-ated on a straight line basis over the expected useful life. Depreciation is reported in administration expenses. The applicable depreciation rate is 33.3%. If the criteria for recognition are not satisfied, the expenses are recognised immediately in profit or loss. Intangible assets are examined every year for indications of a possible impairment or a change in the en-try into service or useful life.

100

(14) Other assets

Other assets is a summary item for all other asset items which cannot be allocated and are not significant on an individual basis. As of the reporting date there were no long-term assets or disposal groups classi-fied as being held for disposal.

(15) Liabilities

Liabilities to banks and customers and securitised liabilities are valued at amortised cost, except where these are categorised in the fair value option or the underlying transaction is categorised as a fair value hedge.

(16) Liabilities held for trading

Liabilities held for trading contain all financial liabilities held for trading and derivative financial instruments with negative market values not designated as hedging instruments under hedge accounting criteria within the meaning of IAS 39. The value of liabilities held for trading plus realised gains and losses and current income are – except for current income from derivatives that are in economic hedges – reported in the income statement under the result from fair value measurement.

(17) Negative market values (fair values) from derivative financial instruments (hedge accounting)

This balance sheet item contains derivative financial instruments with negative market value which are used as hedges and meet hedge ac-counting criteria within the meaning of IAS 39. The derivative instru-ments are measured at fair value. Both changes in the fair value of the hedging instruments and changes in the fair value of underlying transac-tions that arise from the hedged risk are reported under the result from hedging transactions (hedge accounting). Interest income and expenses from hedging derivatives are reported under net interest income.

101

No

tes(18) Provisions

Provisions for pensions and other provisions are reported under this item.

Provisions for pensions The Bank’s pension plan is based on a contribution system in which employees acquire entitlements to benefits. The pension plan has been outsourced to an external insurer and was presented in previous years as a defined contribution plan. Based on new information, the existing pension plan was reclassified in the reporting year as a defined benefit plan in accordance with IAS 19. To improve transparency, the Bank also decided to make early use of revised IAS 19 in the 2012 financial year. This resulted in additional disclosure requirements (Note 46), in addition to gains/losses with an effect on the income statement and actuarial gains/losses which are recognised in equity with no effect on the in-come statement. In addition, the reclassification resulted in a change in accounting methods and made the retrospective application to the prior year (IAS 8) in the amount of EUR 731,000 necessary, which is pre-sented in the item Other assets; the offsetting adjustment is presented in equity (see statement of changes in equity).

The calculation of pension obligations takes place annually using actuari-al documents. In this evaluation, assumptions about the future develop-ment of certain parameters that have an effect on the level of benefits, such as salary and pension trends, are taken into account.

In the calculation of the pension provisions, the difference between the present value of the pension obligations and the fair value of the plan as-sets used to cover the pension obligations is used to calculate pension provisions; this corresponds to the balance sheet item pension obliga-tions. The annual evaluation is based on assumptions and estimates of numerous parameters. However, the actual developments usually dif-fer from the assumptions made and require an annual adjustment of the valuation parameters. This results in discrepancies between the ex-pected values at the beginning of the calculation period and the values calculated at the end of the year. These differences are designated as actuarial gains and losses.

103

No

tesBecause of the amendment to IAS 19, interest expenses and unrecog-

nised service expenses were recorded immediately in the reporting year.

In addition, there is a provision for other defined benefit pensions as per IAS 19 in place for a former employee.

The calculation of the pension provisions was based on the following actuarial assumptions:

In % 2012 2011

Discount rate 3.5 5.5

Expected income from plan assets 3.5 5.5

Salary trend 3.0 3.0

Inflation rate 2.5 2.5

Bond trend 0.0 0.0

The IGGS table was used as the basis for the calculation of the mortality tables and invalidity.

Other provisionsOther provisions are set up in accordance with IAS 37 for present legal or de facto obligations, where it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation. The amount of the provision corresponds to the best possible estimate of the amount which would be required to settle the obligation on the balance sheet reference date. In determining the figure, the risks and uncertainties associated with the obligation are taken into account.

104

(19) Other liabilities

Other liabilities is a summary item for all other liability items which cannot be allocated and are not significant on an individual basis. Asset groups held for disposal are not included.

(20) Subordinated capital

Effective 2 January 2007, the Bank had issued profit participation cer-tificates in the amount of EUR 272,000,000. BayernLB holds 100% of the profit participation certificates of LBLux. The term for the profit par-ticipation certificates ends on 2 January 2022. Profit participation certifi-cates are a debt capital instrument within the meaning of IAS 32; they are reported in the subordinated capital balance sheet item. The profit participation certificate agreement includes a performance fee. In the prior year, the profit participation certificates were used for the first time to offset losses; in 2012, this loss was fully recovered.

(21) Current taxes

Current income tax assets and liabilities are measured by applying the currently applicable tax rates. Income tax receivables and income tax li-abilities are booked in the amount of the expected refund or payment.

Deferred income-tax assets and liabilities arise from differing approaches to the valuation of an asset in the balance sheet or a liability and the rel-evant tax valuation. This can be expected to result in future income-tax burdens and reliefs, which are designated as temporary differences.

Deferred taxes on the asset side on unused tax loss carryforwards and deductible temporary differences are recognised in the balance sheet only to the extent that it is probable that in the future there will be sufficient taxable profits arising to ensure that the tax advantages can be exploited.

105

No

tesDeferred taxes are not discounted. The formation and continuation of

deferred tax assets and liabilities is recognised in profit or loss if the underlying item was recognised in profit or loss and is not recognised in the income statement if the underlying item was not recognised in the income statement.

Other taxes not dependent on income are shown under Other operating earnings.

3Notes to the statement of comprehensive income

(22) Net interest income

In EUR ‘000 2012 2011

Interest income 153,898 230,362

Interest income from credit and money-market transactions 81,405 102,609

of which interest income from unwinding 2,803 3,276

Interest income from investment assets 48,727 91,333

Interest income from hedge accounting derivatives 12,442 18,333

Interest income from derivatives in economic hedges 11,324 18,087

Interest expenses -105,428 -160,661

Interest expenses for liabilities to banks -19,917 -40,297

Interest expenses for liabilities to customers -15,625 -19,610

Interest expenses for securitised liabilities -7,102 -15,370

Interest expenses for participation rights -14,707 0

Interest expenses from hedge accounting derivatives -34,588 -41,663

Interest expenses from derivatives in economic hedges -13,144 -42,139

Other interest expenses -345 -1,582

Total 48,470 69,701

106

Participation rights payments totalling EUR 14,707,000 are included in the interest expenses for the reporting year. Net interest income also includes interest rate adjustments on impaired loans in the amount of EUR 3,945,000.

The total interest income and expense for financial assets and liabilities, which are carried at fair value with no effect on income and are calcu-lated using the effective interest method total EUR 453,000.

(23) Risk provisions for credit business

In EUR ‘000 2012 2011

Recoveries of amounts written off 1 1

Additions -17,609 -16,979

Additions to portfolio loan loss provision -2,599 0

Direct write-downs -3,366 -2,961

Reversals 21,324 5,539

Total -2,249 -14,400

Risk provision increases and reversals, which were valued at amor-tised cost, relate to seven commitments – refer also to Note (34); a direct write-down was taken on one receivable. In addition, premium payments of EUR 7,280,000 within the context of insurance contracts (credit risks) are included (unchanged from the previous year).

107

Reversals of EUR 21,324,000 were influenced by the transfer of the risk provision for three exposures of EUR 14,242,000 to the insurance company LB-Re. In 2012, the Bank decided to transfer the portfolio impairment of EUR 2,599,000, which was presented in the evaluation of LB-Re, into the risk provision starting in the reporting year. Please refer to Note (34).

(24) Net commission income

In EUR ‘000 2012 2011

Commission income 19,513 20,209

Lending business 4,315 5,203

Asset advice, asset management 10,011 10,391

of which institutional customers 2,392 3,611

of which private customers 7,619 6,780

Custodian bank function 5,159 4,590

Fiduciary business 28 25

Commission expense -1,634 -1,591

Transaction charges -1,619 -1,531

Other commission expense -15 -60

Total 17,879 18,618

The lending business with corporate, project and real estate customers was sluggish and commission income declined by around 17%. Income from clients rose, and the custodian bank business also recorded an increase.

108

(25) Result from fair value measurement

In EUR ‘000 2012 2011

Trading result 2,051 1,360

Interest-related transactions 180 405

Equity-related/index-related transactions 299 198

Currency-related transactions 1,571 755

Other financial transactions 1 2

Fair value result from the fair value option 8,546 -4,036

Total 10,597 -2,676

Trading results include realised and unrealised gains and losses attribut-able to trading activities, the interest and dividend income related to such transactions and the funding costs for the trading portfolios. The results of foreign exchange translation are also reported here. Interest income and expenses from the portfolios in the fair value option and derivatives in economic hedges are reported under net interest income.

109

No

tes(26) Result from hedge accounting

In EUR ‘000 2012 2011

Value of underlying transactions 8,062 19,369

Value of hedging instruments -8,880 -19,123

Total -818 246

(27) Result from investment assets

In EUR ‘000 2012 2011

Result from investment assets in the “Loans and receivables” category 2,902 248

Gains on sales 1,234 249

Losses from sales -20 -1

Income from write-downs 1,688 0

Result from investment assets in the “Available for sale” category 693 -97,070

Gains on sales 693 932

Income from write-downs 0 1,479

Expenses from write-downs 0 -99,481

Total 3,595 -96,822

110

Gains on sales totalled EUR 1,927,000. The income from write-downs is the result of bonds from Lehman Brothers Holding Inc., matured but not sold, with up/downside potential with a book value at the time of transfer of EUR 3,770,000.

(28) Administrative expenses

In EUR ‘000 2012 2011

Personnel expense -18,842 -17,386

Salaries and wages -15,635 -14,564

Social security contributions -1,972 -1,793

Pensions -1,018 -821

Support and additional social benefits -217 -208

Other administrative expenses -10,964 -10,143

Building costs -2,586 -2,593

IT costs -3,608 -3,530

Office costs -202 -216

Advertising -602 -456

Communication and other selling costs -954 -1,006

Legal and consulting fees -1,104 -899

Miscellaneous administrative expenses -1,908 -1,443

Depreciation of property, plant and equipment and intangible assets -3,133 -3,207

Total -32,939 -30,736

Other administrative expenses include i.a. expenses for training and ad-vanced training of EUR 379,000 (2011: EUR 298,000) and cost alloca-tions from group adjustments of EUR 363,000 (2011: EUR 182,000).

111

No

tesThe company pension plan for the employees was outsourced to an ex-

ternal insurer. In accordance with IAS 19, personnel expense includes contributions to pension plans for employees as part of a defined benefit plan in the amount of EUR 638,000, which is shown as a current expense.

(29) Other results

In EUR ‘000 2012 2011

Rental income 410 471

Other income 5,358 3,314

Income from assumption of losses from participation rights 0 22,181

Expenses from assumption of losses from participation rights -22,181 0

Other expenses -4,021 -2,559

Asset taxes -1,356 -1,641

Total -21,790 21,766

In contrast to the previous year, the majority of other results is attribut-able to the adjustment of income from the assumption of losses from participation rights recognised on the balance sheet (EUR 22,181,000). Other significant items in other income are income from services (mainly IT), including for key locations in the BayernLB Group of EUR 2,488,000.

Other expenses mainly includes the premium payments made for in-surance contracts (other risks) of EUR 1,716,000 and the payment of a general guarantee to the shareholder of EUR 1,064,000.

112

(30) Income taxes

In EUR ‘000 2012 2011

Current income taxes 0 1,123

Corporate income tax 0 1,196

Trade tax 0 -73

Deferred income taxes -6,944 10,148

Corporate income tax -5,308 7,770

Trade tax -1,636 2,378

Total -6,944 11,271

Of the deferred tax loss carryforwards of EUR 10,123,000, EUR 7,105,000 were used, EUR 136,000 resulted from the change in tax rates as the tax rate applying to deferred income tax assets and liabilities increased from 28.80% to 29.22%. The reasons for this deviation relating to the income tax rate and effective tax rate are shown in the table below.

In EUR ‘000 2012 2011

Result for the year before income taxes as per IFRS 22,745 -34,303

Income tax rate (in %) 28.80% 28.80%

Anticipated cost of income taxes (+) / income (–) 6,551 -9,879

Effects from tax-exempt income – 130

Effects from current taxes from previous years – -1,123

Effects from temporary differences 25 25

Effects from changes in tax rates -136 –

Effects from permanent differences – 609

Effects from tax adjustment entries – -1,070

Effects from non-deductible expenses 504 37

Effective cost of income taxes (+) / income (–) 6,944 -11,271

Effective income tax rate (in %) 30.53% -32.86%

113

No

tes4

Notes to the balance sheet

(31) Cash reserves

In EUR ‘000 2012 2011

Cash in hand 3,874 1,736

Balances with central banks 87,756 53,031

Total 91,630 54,767

(32) Loans and advances to banks

In EUR ‘000 2012 2011

Loans and advances to banks 605,402 605,823

Total 605,402 605,823

Breakdown by maturity

In EUR ‘000 2012 2011

Time to maturity of

payable on demand 120,809 90,197

up to three months 6,095 89

between three months and one year 462 0

between one year and five years 276,813 179,288

more than five years 201,223 336,249

Total 605,402 605,823

114

(33) Loans and advances to customers

In EUR ‘000 2012 2011

Loans and advances to customers 2,238,705 2,688,373

Total 2,238,705 2,688,373


In EUR ‘000 2012 2011

Time to maturity of


up to three months 968,753 1,146,841

between three months and one year 188,364 355,966



Total 2,238,705 2,688,373

(34) Risk provisions

In EUR ‘000 2012 2011

Balance at the beginning of the financial year -40,483 -39,958

Utilisation 3,988 372

Changes recognised through profit or loss 11,207 -897

Additions to individual exposures -10,330 -9,699

Additions to portfolio loan loss provision -2,599 0

Reversals 21,325 5,539

Unwinding 2,803 3,276

Price changes 8 -13

Balance at the end of the financial year -25,288 -40,483

115

No

tesThe risk provision was reduced by EUR 15.1 million. A new provision

in the amount of EUR 1.1 million was formed and additions to already impaired receivables totalled EUR 9.2 million. In the reporting year, the portfolio impairment in the amount of EUR 2.6 million was presented in the risk provision; in previous years it was included in the measurement of LB-Re. In addition, a reversal was made following a contractually pro-vided repayment (EUR 7.1 million) and reversals from the transfer of the risk provision from the Bank to LB-Re in the amount of EUR 14.2 million.

(35) Assets held for trading

In EUR ‘000 2012 2011

Positive market values (fair values) from derivative financial instruments 82,996 157,571

Total 82,996 157,571

The derivative financial instruments represent transactions that have a commercial hedging relationship with other transactions.

The Bank made use of the changes resolved by the IASB to IAS 39.50 and reclassified a nominal amount of EUR 257 million in bonds as of 1 July 2008 from the held for trading category to loans and re-ceivables. Further detailed information about reclassifications can be found in Note (53).

116


In EUR ‘000 2012 2011

Time to maturity of


up to three months 6,226 23,171




Total 82,996 157,571

(36) Investment assets

In EUR ‘000 2012 2011

Investment assets in the “Loans and receivables” category 275,456 679,282

Bonds and debt securities 275,456 679,282

Investment assets in the “Available for sale” category 1,119,624 1,642,879

Bonds and debt securities 1,093,460 1,616,655

Shares in unconsolidated subsidiary companies 26,159 26,219

Equity participations 5 5

Investment assets: fair value option 0 541,801

Bonds and debt securities 0 541,801

Total 1,395,080 2,863,962

The investment assets in the “Loans and receivables” category result from the reclassification of securities in the “Available for sale” and “Held for trading” categories. For further information see Note (53).

117

No

tes

In EUR ‘000 2012 2011

Bonds, notes and other fixed-interest securities 1,368,916 2,837,738

Bonds and debt securities 1,368,916 2,837,738

Share in unconsolidated subsidiary companies 26,159 26,219

Other participations 5 5

Total 1,395,080 2,863,962

Assets assigned as collateral that the secured party has the contractual or customary right to dispose of or reassign are reported separately in the bal-ance sheet and are not included in investment asset holdings. As at 31 De-cember 2012, their total value was EUR 89 million (2011: EUR 621 million).

In accordance with IAS 27.10, the LB-Re participation is not consolidated and is treated as available for sale in accordance with IAS 39. LB-Re is val-ued at its equity plus 85% of the existing equalisation reserve.

Further information about the effects on the earnings statement can be found in Note (27): Result from investment assets.


In EUR ‘000 2012 2011

Undated maturities 26,164 26,224

Time to maturity of 1,368,916 2,837,738



between one year and five years 877,387 1,533,523


Total 1,395,080 2,863,962

119

No

tesCompanies in which the Bank holds at least 20% of the capital

Capital stake(in %)

Equity(in EUR ‘000)

Last available financial

statement

Result(in EUR ‘000)

LB-Re S.A., Luxembourg 100 5,000 31.12.2012 0

(37) Property, plant and equipment

In EUR ‘000 2012 2011

Land and buildings for own use 27,182 28,103

Operating and office equipment 688 920

Total 27,870 29,023

The building in Luxembourg-Kirchberg is used mostly (95%) for the Bank’s own activities.

For the development of property, plant and equipment, see page 120.

(38) Intangible assets

In EUR ‘000 2012 2011

Other intangible assets 4,054 3,345

Total 4,054 3,345

As in the previous year, the additions to the Bank’s intangible assets are the result of external services provided within the context of a project for the replacement of one of the Bank’s core banking systems. This project includes a contractually established financial obligation of EUR 283,000 payable in 2013.

120

As part of the project to replace the core banking system, a review of the capitalised project costs by their economic life was undertaken in the re-porting year (IAS 38.104). This review resulted in the postponement of the useful life of some capitalised items to the 2013 financial year. The depreciation that did not result from this amounts to EUR 533,000.

For the development of the intangible assets, refer to the following table.

In EUR ‘000

Cost of purchase/

production cost at the beginning

of the financial year

Additions Disposals Cost of purchase/

production cost at the end


Cumulative scheduled

depreciation 01.01.12


depreciation31.12.12

Book value at the end of the financial year

Intangible assets 5,948 2,026 233 7,741 2,603 3,687 4,054

Changes in intangible assets

In EUR ‘000

Cost of purchase/











Land and buildings for own use 45,345 299 821 44,823 17,242 17,641 27,182

Technical facilities and machinery 3,642 225 306 3,561 3,132 3,238 323

Other systems, operating and office equipment 2,346 139 1,220 1,265 1,936 900 365

Property, plant and equipment 51,333 663 2,347 49,649 22,310 21,779 27,870

Changes in property, plant and equipment

121

No

tes

In EUR ‘000

Cost of purchase/











Intangible assets 5,948 2,026 233 7,741 2,603 3,687 4,054

In EUR ‘000

Cost of purchase/











Land and buildings for own use 45,345 299 821 44,823 17,242 17,641 27,182

Technical facilities and machinery 3,642 225 306 3,561 3,132 3,238 323

Other systems, operating and office equipment 2,346 139 1,220 1,265 1,936 900 365

Property, plant and equipment 51,333 663 2,347 49,649 22,310 21,779 27,870

122

(39) Income tax assets

In EUR ‘000 2012 2011

Current income tax assets 3,750 3,750

Deferred income tax assets 17,698 43,364

Total 21,448 47,114

Deferred tax assets and liabilities have been formed in relation to the following items and to tax loss carryforwards:

In EUR ‘000 2012 2011

Deferred taxes on the asset side

Investment assets 14,533 33,241

Loss carryforwards 3,165 10,123

Total deferred taxes on the asset side 17,698 43,364

Deferred taxes on the liability side

Other liabilities 796 810

Total deferred taxes on the liability side 796 810

Around 70% of the loss carryforwards was used in the reporting year; there is no time limit on the use of loss carryforwards in Luxembourg.

123

(40) Other assets

In EUR ‘000 2012 2011

Other assets 34,200 31,814

Total 34,200 31,814

The item mainly includes the precious metal holdings of the Bank, as a counter-item to client assets (EUR 32,593,000).

(41) Liabilities to banks

In EUR ‘000 2012 2011

Liabilities to banks 1,900,220 3,017,677

Total 1,900,220 3,017,677

Liabilities to banks include EUR 70,000,000 in deposits assigned as collateral in connection with repurchase transactions as well as EUR 201,454,000 in deposits at the Luxembourg central bank.


In EUR ‘000 2012 2011

Time to maturity of


up to three months 821,815 1,899,958



Total 1,900,220 3,017,677N

ote

s

124

(42) Liabilities to customers

In EUR ‘000 2012 2011

Liabilities to customers 1,656,626 1,527,474

Total 1,656,626 1,527,474


In EUR ‘000 2012 2011

Time to maturity of





more than five years 1,502 0

Total 1,656,626 1,527,474

125

No

tes(43) Securitised liabilities

In EUR ‘000 2012 2011

Bonds and notes issued 9,655 993,543

Total 9,655 993,543

Two bonds issued with a nominal value of EUR 1 billion were bought back in the reporting year.


In EUR ‘000 2012 2011

Time to maturity of


between three months and one year 1,621 0

between one year and five years 0 991,765

Total 9,655 993,543

126

(44) Liabilities held for trading

In EUR ‘000 2012 2011

Negative market values (fair values) from derivative financial instruments 92,172 188,572

Total 92,172 188,572

The derivative financial instruments represent transactions that have a commercial hedging relationship with other transactions.


In EUR ‘000 2012 2011

Time to maturity of






Total 92,172 188,572

127

No

tes(45) Negative market values (fair values)

from derivative financial instruments (hedge accounting)

In EUR ‘000 2012 2011

In relation to investment assets (underlying transaction) 80,424 79,047

Total 80,424 79,047


In EUR ‘000 2012 2011

Time to maturity of

up to three months 514 441




Total 80,424 79,047

128

(46) Provisions

The reversal of staff provisions of EUR 497,000 results from unpaid per-formance fees for the 2011 financial year and a pension entitlement that was not transferred. The staff provision of EUR 124,000 relates to defer-rals in accordance with CSSF Circular 10/496 on remuneration policy. Of the staff provisions, EUR 58,000 is due in more than 12 months; because most of the maturities will be reached in less than a year, the other provi-sions were not discounted.

Other provisions are set up in accordance with IAS 37 for present or de facto obligations, where it is probable that an outflow of resources with economic benefits will be required to settle the obligation.

In EUR ‘000

Balance at the beginning of the

financial year

Utilisation Transfer Reversal Additions Balance at the end of the

financial year

Provisions for pensions and similar obligations 295 0 0 0 981 1,276

Other provisions 805 33 67 497 0 342

of which staff provisions 584 30 67 497 0 124

of which other provisions 221 3 0 0 0 218

Total 1,100 33 67 497 981 1,618

129

In EUR ‘000

Balance at the beginning of the

financial year

Utilisation Transfer Reversal Additions Balance at the end of the

financial year

Provisions for pensions and similar obligations 295 0 0 0 981 1,276

Other provisions 805 33 67 497 0 342

of which staff provisions 584 30 67 497 0 124

of which other provisions 221 3 0 0 0 218

Total 1,100 33 67 497 981 1,618

Provisions for pensions and similar obligationsThe amount recognised on the balance sheet for pension provisions is derived as follows:

In EUR ‘000 2012 2011

Present value of defined benefit obligation 7,908 5,579

Fair value of plan assets 6,988 6,309

Pension provision/receivable 920 -731

Present value of other pension obligation 356 295

Recognised pension provision/receivable 1,276 -436

As the Bank’s pension scheme was presented as a defined contribution plan in the previous year, the previous year’s values of the defined ben-efit plans (EUR -731,000) are shown in equity.

The pensions relate to 184 members; when the employee retires, the entitlements and the risks are transferred to the insurer.

In addition, there is a pension provision of EUR 356,000 as per IAS 19 in place for a former employee.

No

tes

130

The present value of the defined benefit obligations (DBO) can be derived from the holdings at the beginning and end of the year as follows:

In EUR ‘000 2012 2011

Opening value 5,579 6,844

Current service cost 469 470

Interest expense 307 376

Pension benefits paid -232 -1,966

Closing value 6,123 5,724

Actuarial gains and losses 1,785 -145

Present value of defined benefit obligation 7,908 5,579

The fair value of plan assets developed as follows:

In EUR ‘000 2012 2011

Fair value of plan assets – opening value 6,309 7,185

Expected income from plan assets 381 432

Contributions paid by employer 549 589

Pension benefits paid -116 -1,841

Closing value 7,123 6,365

Actuarial gains and losses -135 -56

Fair value of plan assets 6,988 6,309

131

The pension scheme of LBLux is part of a group insurance policy. The insurer has guaranteed an interest rate of 4%, regardless of the return on investment.

The gains and losses are recognised as follows:

In EUR ‘000 2012 2011

Current service cost 469 470

Interest expense for the pension obligations (DBO) 307 376

Expected income from plan assets -381 -431

Gains and losses 395 415

The following sensitivity analyses were performed, which change the defined benefit obligations as follows:

In EUR ‘000

Change in DBO discount rate -0.5% 8,460

+0.5% 7,396

Change in salaries -0.5% 6,966

+0.5% 9,073

Change in bonds -0.5% 8,460

+0.5% 7,396

Change in mortality table -1 year 7,941

+1 year 7,871

No

tes

133

No

tes(47) Income tax liabilities

In EUR ‘000 2012 2011

Current income tax liabilities 3,241 3,241

Deferred income tax liabilities 796 810

Total 4,037 4,051

A breakdown of deferred tax liabilities is given in Note (39) together with deferred tax assets.

(48) Other liabilities

In EUR ‘000 2012 2011

Other tax liabilities 8,541 6,126

Other liabilities 4,738 4,733

Total 13,279 10,859

Other tax liabilities include the asset tax from the years 2011 and 2012 as well as the withholding tax in accordance with the EU Savings Tax Directive. Other liabilities includes no holdings that mature in more than 12 months.

134

(49) Subordinated capital

In EUR ‘000 2012 2011

Profit participation certificates 286,707 249,819

Total 286,707 249,819

The nominal value of the participation rights is EUR 272,000,000. There is a contractually agreed recovery obligation, so that the resulting par-ticipation loss from the previous year was completely recovered in 2012. The expense incurred for earnings-related remuneration for subordinat-ed liabilities in the financial year totalled EUR 14,707,000.


In EUR ‘000 2012 2011

Time to maturity of

up to three months 14,707 0


Total 286,707 249,819

135

No

tes(50) Equity

In EUR ‘000 2012 2011


Statutory nominal capital 300,000 300,000

Shares in circulation 240,000 240,000

Capital reserve 140,982 142,237*


Net profit or loss for the reporting period 15,801 0

Total 431,359 369,898

* Adjustments in accordance with IAS 8, see Note (2)

As of the balance sheet date, the subscribed and fully paid-in company capital of the Bank is EUR 300,000,000. It is split into 240,000 no-par-value shares.

Reserves:The reserves include the statutory reserve equal to 10% of the compa-ny’s capital. Retained earnings consist of sums allocated from reserves from previous years’ results and from the negative result of the current year. The figure for revenue reserves currently stands at EUR 21 million. Also included in the reserves are the initial application effects from the initial application of IFRS.

Revaluation reserve:This item contains the revaluation result of “Available for sale” financial instruments not recognised in the income statement. The counter-items from the formation of deferred taxes on the asset or liability side on profit-neutral valuation differences are also included.

137

5Notes to the financial instruments

(51) Fair value of financial instruments

The notes on the risks arising from financial instruments under IFRS 7 are contained in the risk report.

Fair value Book value Fair value Book value

In EUR ‘000 2012 2012 2011 2011

Assets

Cash reserves 91,630 91,630 54,767 54,767

Loans and advances to banks 675,403 605,402 649,260 612,798

Loans and advances to customers 2,227,788 2,238,705 2,679,292 2,688,373

Assets held for trading 82,996 82,996 157,571 157,571

Investment assets 1,386,327 1,395,080 2,804,318 2,837,738

Liabilities

Liabilities to banks 1,907,319 1,900,220 3,012,096 3,017,677

Liabilities to customers 1,656,543 1,656,626 1,527,094 1,527,474

Securitised liabilities 9,136 9,655 987,323 993,543

Liabilities held for trading 92,172 92,172 188,572 188,572

Negative market values (fair values) from derivative financial instruments (hedge accounting)

80,424 80,424 79,047 79,047

With regard to determining the fair value of financial instruments, we refer to our remarks in Note (5).

No

tes

138

(52) Financial instrument valuation categories

Book value Book value

In EUR ‘000 2012 2011

Assets

Financial assets at fair value through profit or loss 139,533 870,914

HfT: Assets held for trading 82,996 157,571

FVO: Loans and advances to banks 21,670 59,581

FVO: Loans and advances to customers 34,867 111,961

FVO: Investment assets 0 541,801

Financial assets available for sale 1,119,624 1,642,878

AfS: Investment assets 1,119,624 1,642,878

Loans and receivables 3,154,656 3,856,704

L/R: Cash reserves 91,630 54,767

L/R: Loans and advances to banks 583,732 546,242

L/R: Loans and advances to customers (not including individual impairments) 2,203,838 2,576,412

L/R: Investment assets 275,456 679,283

Liabilities

Financial liabilities at fair value through profit or loss 128,808 727,262

HfT: Liabilities held for trading 92,172 188,572

FVO: Liabilities to banks 0 0

FVO: Liabilities to customers 36,636 47,488

FVO: Securitised liabilities 0 491,202

Liabilities measured at amortised cost 3,816,572 5,249,823

OFL: Liabilities to banks 1,900,220 3,017,677

OFL: Liabilities to customers 1,619,990 1,479,986

OFL: Securitised liabilities 9,655 502,341

OFL: Subordinated capital 286,707 249,819


80,424 79,047

139

The following table shows the changes induced by credit ratings in fair value for receivables from credit business and financial liabilities.

In EUR ‘000 2012 2011

Receivables from credit business

Cumulative change in fair value -1,031 -3,363

Fair value change 2012/2011 2,332 -775

Financial liabilities

Cumulative change in fair value -44 9,401

Fair value change 2012/2011 -9,446 4,036

(53) Reclassification of financial assets

As of 1 July 2008, in accordance with the Amendment of IAS 39 and IFRS 7 “Reclassification of Financial Assets” by the IASB and Com-mission Directive (EC) No. 1004/2008 of 15 October 2008, LBLux re-classified securities from the “Available for sale” and “Held for trading” categories to the “Loans and receivables” category.

The securities transferred from the “Available for sale” category to “Loans and receivables” had no active market, nor was there any inten-tion to sell or trade them in the short term. LBLux has the intention and the capability to hold them for the foreseeable future. For the securities transferred from the “Held for trading” category to “Loans and receiva-bles”, the market situation was characterised by extraordinary circum-stances within the meaning of IAS 39.50B (the bid-ask spread had wid-ened by more than 80% in comparison with normal market conditions).

No

tes

140

The fair and book values of the reclassified securities as of the report-ing date, by their categories of origin, were as follows:

Fair value Fair value Book value Book value

In EUR ‘000 2012 2011 2012 2011

Securities transferred from “Available for sale” to “Loans and receivables”

217,728 527,827 221,538 550,593

Securities transferred from “Held for trading” to “Loans and receivables”

48,975 118,036 53,918 128,690

Total 266,703 645,863 275,456 679,283

In accordance with IAS 39 in conjunction with IFRS 7.12A (e), the chang-es in the value of the reclassified securities, whether recorded in the income statement or not, are as follows (no reclassification):

In EUR ‘000 2012 2011

Reclassified from the “Available for sale” category

Result from investment assets

Gains on disposal 0 0

Change in the revaluation surplus (with no amortisation effects) 16,010 -1,784

Total 16,010 -1,784

Reclassified from the “Held for trading” category

Result from fair value measurement 4,900 -1,257

Total 4,900 -1,257

141

No

tesThe following table lists the changes in value, whether recorded in the

income statement or not, and the current results with reclassification. Unlike the previous table, all earnings effects including current earnings components are recorded.

In EUR ‘000 2012 2011

Reclassified from the “Available for sale” category

Net interest

Net interest from debt securities and other fixed-interest securities 3,698 10,895

Result from investment assets

Gains on disposal 0 0

Change in the revaluation surplus 6,159 9,772

Total 9,857 20,667

Reclassified from the “Held for trading” category

Net interest

Net interest from debt securities and other fixed-interest securities 1,475 3,629

Total 1,475 3,629

142

(54) Derivatives transactions

The tables below show the interest rate-related and foreign currency-related derivatives, as well as other forward transactions not yet settled as per the balance sheet date. Most were concluded to hedge fluctua-tions in interest rates, exchange rates or market prices and trades on behalf of customers.

Volumes

Nominal values Nominal values Market values Positive

Market values Negative

In EUR ‘000 2012 2011 2012 2012

Interest-rate risks

Cap 0 22,831 0 0

Interest rate swaps 1,504,575 2,449,173 27,776 112,516

Interest rate options 41,924 41,924 2,083 2,083

Call options 20,962 20,962 2,083 0

Put options 20,962 20,962 0 2,083

Total interest rate risks 1,546,499 2,492,966 29,859 114,599

Currency risks

Foreign-exchange forward contracts 1,156,727 2,533,501 4,859 9,719

Currency options 84,884 116,136 8,220 8,220

Call options 42,442 58,068 8,220 0

Put options 42,442 58,068 0 8,220

Total currency risks 1,241,611 2,649,637 13,079 17,939

Equity/other price risks

Equity/index options 221,388 207,328 40,058 40,058

Call options 110,694 103,664 40,058 0

Put options 110,694 103,664 0 40,058

Equity/other price risks, total 221,388 207,328 40,058 40,058

Total 3,009,498 5,349,931 82,996 172,596

143

The negative market values for foreign-exchange forward contracts (EUR 9,719,000) include the adjustment account as the counter-position for the cash position secured by forward transactions, as well as for forward transactions secured by cash positions, of EUR 4,890,000 (not recognised in the income statement).

Breakdown of maturity

No

tes

Nominal values – Remaining maturities

In EUR ‘000

up to 3 months

up to 1 year

up to 5 years

more than 5 years

Total

Interest-rate risks

2012 20,000 308,324 727,741 490,434 1,546,499

2011 80,000 118,728 1,523,804 770,434 2,492,966

Currency risks

2012 1,005,262 210,067 26,282 0 1,241,611

2011 2,444,082 137,736 67,819 0 2,649,637

Equities/other price risks

2012 38,883 182,504 0 0 221,387

2011 32,856 174,472 0 0 207,328

Breakdown of counterparties

Nominal values Nominal values Market values Positive

Market values Negative

In EUR ‘000 2012 2011 2012 2012

OECD banks

Positive market values 96,428 1,614,907 4,966 0

Negative market values 2,278,402 2,655,858 0 170,032

Other counterparties

Positive market values 542,367 805,310 78,030 0

Negative market values 92,300 273,858 0 2,564

Total 3,009,497 5,349,933 82,996 172,596

144

(55) Notes to items in the cash flow statement

The cash flow statement shows the cash flows for the financial year clas-sified into operating activities, investing activities and financing activities.

The financial resources balance disclosed corresponds to the cash re-serves item in the balance sheet and contains the cash balance as well as deposits with central banks. Financial resources are not subject to any drawing restrictions.

Payments from amounts due from banks/customers, from securities (unless investment assets), derivatives, and other assets are shown as cash flows from operating activities. Payments from amounts due to banks/customers from securitised liabilities and other liabilities are also assigned to operating activities. Interest and dividend payments result-ing from operating activities are also included under cash flows from operating activities.

The cash flow from investment activities shows payment transactions for investment assets, tangible and intangible assets.

The cash flow from financing activities includes dividends and pay-ments to holders of profit-participation rights and silent partners.

6Notes to the

cash flow statement

145

7Supplementary information

(56) Assets and liabilities in foreign currency

In EUR ‘000 2012 2011

Foreign currency assets 478,202 1,814,159

CAD 1,578 52,035

CHF 58,567 716,997

GBP 19,267 55,136

HKD 1,640 531

JPY 22,902 254

USD 260,930 797,180

Other currencies 113,318 192,026

Foreign currency liabilities 515,313 1,866,695

CAD 1,568 52,015

CHF 57,319 717,559

GBP 19,310 55,055

HKD 1,628 424

JPY 24,279 15,441

USD 295,028 833,787

Other currencies 116,181 192,414

No

tes

146

(57) Assets pledged as collateral

All risks and opportunities associated with the transferred assets re-main with the Bank. All asset transfers were transacted on normal market terms.

In EUR ‘000 2012 2011

Investment assets including:

Securities deposited with the Central Bank 200,000 0

Collateral

Repos 70,000 615,000

Other collateral 18,682 6,152

88,682 621,152

Total 288,682 621,152

(58) Transfer of financial assets

In 2009, the Bank took out a debtor warrant (“Besserungsschein”) with its parent company BLB München relating to Lehman bonds. These bonds matured in 2012 and are presented as loans and advances to banks. The opportunities and risks arising from the contractual agreement are includ-ed in the fair value measurement of the Bank; from the time of calculation in 2009, EUR 4,892,000 has been written off (see Note 27). Essentially all the risks and opportunities associated with the transferred assets remain with the Bank.

147

(59) Contingent liabilities and other liabilities

In EUR ‘000 2012 2011

Contingent liabilities

From guarantees and indemnity agreements 110,733 136,568

Other liabilities

Irrevocable credit commitments 1,145,302 1,180,565

Total 1,256,035 1,317,133

The Bank’s contingent liabilities and other liabilities mainly constitute po-tential future liabilities arising both from guarantees issued and from lines of credit irrevocably granted to customers but not yet drawn down. The sums given reflect possible liabilities in the event that both the credit lines and the guarantees are drawn down in full. The loan commitments and contingent liabilities shown here do not constitute expected future payment flows under these contracts, since many of these agreements expire without being drawn down.

No

tes

148

(60) Trust activities

In EUR ‘000 2012 2011

Trust assets

Loans and advances to customers 7,594 5,223

Trust liabilities

Liabilities to customers 7,594 5,223

(61) Other financial obligations

The Bank has concluded a longer-term rental contract; the resulting fu-ture payment obligations amount to a total of EUR 166,000. The rented premises are set up as a “backup centre” for a possible crisis, in order to ensure prompt continuation of the business operation. Furthermore, financial obligations from leasing contracts total EUR 283,000.

BayernLB has granted LBLux a credit line in the amount of EUR 600,000,000; the draw down on this credit line as at the report date totals EUR 0.

(62) Letter of comfort

The Bank has issued a letter of comfort for LB-Re S.A. in favour of the primary insurer. Proportionate to the size of its equity interest (100%), the Bank ensures that LB-Re S.A. is in a position to fulfil its contractual obligations.

150

(63) External auditors’ fees

The fee for the financial year 2012 for the auditor, KPMG Audit S.a r.l., Luxembourg, and member companies of the KPMG network, included in other administrative expenses, is comprised as follows:

In EUR ‘000 (incl. statutory VAT) 2012 2011

Financial statements audit 241 241

Other audit services 110 152

Tax consultancy services 76 60

Other services 17 9

Total 444 462

(64) Employees

The average number of people employed during the reporting year was:

2012 2011

Management body 9 9

Employees 173 163

Total 182 172

151

(65) Related party disclosures

LBLux maintains business relations with related parties. The transac-tions with related parties recorded as at the reporting date and during the financial year 2012 (among them money-market, foreign-exchange and securities transactions, lending, IRS) were conducted as part of nor-mal business activities on normal market terms and conditions. All trans-actions with related parties were conducted on normal market terms and conditions.

For identifying related parties, the Bank distinguishes between:• The shareholder BayernLB (including its respective branches).• The investees of the parent company. These are subsidiaries of

BayernLB (DKB, MKB, Realis and BayernInvest).• The investees of LBLux. This takes into consideration the reinsurance

company, LB-Re S.A., in which the Bank holds 100%.

No

tes

152

Loans and advances to related parties:

In EUR ‘000

Shareholders of LBLux

2012 2011

Associatedcompanies of the parent company

2012 2011

Associatedcompanies

of LBLux 2012 2011

Assets

Loans and advances to banks 476,899 462,282 0 0 0 0

Loans and advances to customers 0 0 47,288 0 1 1

Assets held for trading 3,314 11,877 0 0 0 0

Positive market values (fair values) from derivative financial instruments (hedge accounting)

0 0 0 0 0 0

Investment assets 0 6,975 0 529,407 26,159 26,219

Total assets 480,213 481,134 47,288 529,407 26,160 26,220

Liabilities

Liabilities to banks 629,467 782,163 0 0 0 0

Liabilities to customers 0 0 52,889 11,483 10,785 1,737

Securitised liabilities 0 991,765 0 0 0 0

Liabilities held for trading 20,099 66,811 0 0 0 0


54,435 51,742 0 0 0 0

Subordinated capital 286,707 249,819 0 0 0 0

Total liabilities 990,708 2,142,300 52,889 11,483 10,785 1,737

153

In EUR ‘000


2012 2011


2012 2011

Associatedcompanies

of LBLux 2012 2011

Assets

Loans and advances to banks 476,899 462,282 0 0 0 0

Loans and advances to customers 0 0 47,288 0 1 1

Assets held for trading 3,314 11,877 0 0 0 0

Positive market values (fair values) from derivative financial instruments (hedge accounting)

0 0 0 0 0 0

Investment assets 0 6,975 0 529,407 26,159 26,219

Total assets 480,213 481,134 47,288 529,407 26,160 26,220

Liabilities

Liabilities to banks 629,467 782,163 0 0 0 0

Liabilities to customers 0 0 52,889 11,483 10,785 1,737

Securitised liabilities 0 991,765 0 0 0 0

Liabilities held for trading 20,099 66,811 0 0 0 0


54,435 51,742 0 0 0 0

Subordinated capital 286,707 249,819 0 0 0 0

Total liabilities 990,708 2,142,300 52,889 11,483 10,785 1,737

154

Income and expenses vis-à-vis related companies break down as follows:

Remuneration of the management bodies and members of the Board of Administration of LBLux Members of the Executive Board and the Supervisory Board of LBLux and related parties of these members and members of Company Management in key positions (management body):

Related parties hold cash investments of a total volume of EUR 737,000. Loans vis-à-vis related parties total EUR 11,000. The present value of pen-sion obligations vis-à-vis members and former members of the manage-ment, administrative and supervisory bodies as of the reference date amount to EUR 2,910,000. In 2012, disbursements of EUR 20,000 were paid.

In EUR ‘000


2012 2011


2012 2011

Associatedcompanies

of LBLux 2012 2011

Income

Interest income from loans and advances to banks 21,755 21,870 0 0 0 0

Interest income from loans and advances to customers 0 0 88 0 0 1

Interest income from investment assets 0 0 7,076 23,007 0 0

Interest income from derivatives 14,393 22,152 0 0 0 0

Commission income 0 0 9 0 8 8

Other income 1,603 23,774 0 0 0 0

Total income 37,751 67,796 7,173 23,007 8 9

Expenses

Interest expense from liabilities to affiliates (AH) 10,720 20,941 0 0 0 0

Interest expense from liabilities to affiliated customers 0 0 1,505 256 31 53

Interest expense for securitised liabilities 7,012 15,288 0 0 0 0

Interest expense from derivatives 29,358 54,458 0 0 0 0

Interest expense from subordinated liabilities 14,707 0 0 0 0 0

Administrative expenses 363 181 0 0 0 0

Other expenses 23,245 0 0 0 0 0

Total expenses 85,405 90,868 1,505 256 31 53

155

Remuneration of the management bodies and members of the Supervisory Board of LBLux:

The remuneration for the management bodies amounts to EUR 2,357,000 for the financial year 2012. This includes payments due in the short term to employees in the amount of EUR 1,889,000 and other payments due in the long term in the amount of EUR 486,000. Salaries paid for the man-agement and supervisory bodies amounted to EUR 128,000. In 2012, the members of the management and supervisory bodies who were at the same time members of the Executive Board of BayernLB waived their claims to payment of the salaries due to the management and supervi-sory bodies for the 2011 financial year.

No

tes

In EUR ‘000


2012 2011


2012 2011

Associatedcompanies

of LBLux 2012 2011

Income

Interest income from loans and advances to banks 21,755 21,870 0 0 0 0

Interest income from loans and advances to customers 0 0 88 0 0 1

Interest income from investment assets 0 0 7,076 23,007 0 0

Interest income from derivatives 14,393 22,152 0 0 0 0

Commission income 0 0 9 0 8 8

Other income 1,603 23,774 0 0 0 0

Total income 37,751 67,796 7,173 23,007 8 9

Expenses

Interest expense from liabilities to affiliates (AH) 10,720 20,941 0 0 0 0

Interest expense from liabilities to affiliated customers 0 0 1,505 256 31 53

Interest expense for securitised liabilities 7,012 15,288 0 0 0 0

Interest expense from derivatives 29,358 54,458 0 0 0 0

Interest expense from subordinated liabilities 14,707 0 0 0 0 0

Administrative expenses 363 181 0 0 0 0

Other expenses 23,245 0 0 0 0 0

Total expenses 85,405 90,868 1,505 256 31 53

Banque LBLux

Banque LBLux S.A.3, rue Jean MonnetL-2180 LuxembourgTelephone: (+352) 42 434-1Fax: (+352) 42 434-5099E-Mail: [email protected]

BayernLB

Bayerische LandesbankBrienner Straße 18D-80333 MünchenTelephone: (+49) 89 21 71-01Fax: (+49) 89 21 71-23579E-Mail: [email protected]

Imprint

Publisher: Banque LBLux S.A.

Layout: Vidale-Gloesener

Printed by:Imprimerie Centrale

April 2013

LBL-BA-2013-001E-1-04

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